* Euro edges near 16-mth high vs dollar, ECB awaited
* Risk demand rises on BofA TARP payback announcement
* Yen slips, traders speculate possibility of intervention
(Updates prices, adds comment)
By Naomi Tajitsu
LONDON, Dec 3 (Reuters) - The euro rose on Thursday, closing in on a 16-month high against the dollar on speculation the European Central Bank may take the first steps in winding down quantitative easing at a policy meeting later in the day.
The dollar slipped after Bank of America's announcement it would repay bailout funds stoked risk demand while the yen continued to struggle on speculation the Bank of Japan could intervene to stem strength in the currency.
The ECB is widely expected to hold rates at a record low 1.0 percent at a policy meeting due to end at 1245 GMT.
Some in the market expect ECB President Jean-Claude Trichet to say in a news conference after the meeting that this month's offer of 1-year funds at rock-bottom rates will be the last in a series of liquidity-boosting operations.
The market will also see whether Trichet will further outline the ECB's exit strategy from fiscal stimulus measures. Many say suggestions of any departure from quantitative easing would be positive for the euro.
In general, QE undermines a currency's value as it expands money supply and could potentially cause inflation.
Investors will also be watching for statements on the euro's recent strength against the dollar, which has taken a broad hit for much of the year on the view that U.S. rates will stay low as those of other countries rise.
At past news conferences, Trichet has backed the official U.S. position in favour of a strong dollar.
"We could see an erratic move if Trichet says something about a strong euro, but that's not likely to happen," said Carl Hammer, currency strategist at SEB in Stockholm.
"Overall, it's likely there won't be anything from the ECB which will be euro negative," he said.
By 1040 GMT, the euro
Some analysts said hawkish statements from Trichet may prompt a test of a 16-month high of $1.5145 hit last week on the view the ECB may raise rates before the Federal Reserve, widening the euro's rate advantage against the dollar.
But others said the euro may face risks in the longer term if the ECB raises rates too soon.
"While those chasing carry might buy EUR on the prospect of higher rates, others will likely sell it for fear that the ECB might choke off the recovery with a premature tightening," analysts at Calyon said in a note.
YEN STRUGGLES
The dollar index <.DXY>, which measures the greenback's performance against a currency basket, was down 0.3 percent.
Despite its losses against most currencies, the dollar
The dollar pulled further away from a 14-year low of 84.82 yen as news Japan's top Finance Ministry official for currencies met U.S. Treasury officials this week ratcheted up speculation Japan may act to slow the yen's appreciation.
The Bank of Japan signalled on Wednesday it was open to more economic stimulus measures, including QE, after its emergency meeting the previous day offered short-term funding, which disappointed markets expecting more measures. [ID:nT182340].
A rise in European shares <.FTEU3> and oil prices
This helped to boost higher-yielding, commodity-based
currencies including the Australian
Risk demand also rose on expectations that BofA
This increased optimism more U.S. banks will soon pay back government bailout money, indicating the banking sector is stabilising after the financial crisis escalated last autumn.
(Editing by Nigel Stephenson) ((naomi.tajitsu@reuters.com; +44 207 542 5830; Reuters Messaging: naomi.tajitsu.reuters.com@reuters.net))