By Ritvik Carvalho
LONDON (Reuters) - The euro surged almost 1 percent against the dollar on Tuesday after European Central Bank President Mario Draghi opened the door to tweaks that might begin to reduce the Bank's emergency stimulus to the economy shortly.
Speaking to a conference in Portugal, Draghi said the central bank could adjust its policy tools of sub-zero interest rates and massive bond purchases as economic prospects improve in Europe.
But any change in the bank's stance should be gradual as "considerable" monetary support is still needed and the rebound in inflation will also depend on favorable global financing conditions, he added.
That sounded to investors, however, that he was ready to give more ground on German demands that the ECB start reducing the volume of extra euros it is feeding monthly into the economy.
The euro surged as Draghi spoke, rising as much as half a percent on the day to $1.1277, its highest level since Jun. 14, up nearly 1 percent on the day.
Draghi also hinted at a willingness to look through some of the factors holding down price growth, which Martin Arnold, currency strategist with ETF Securities in London, said was what the market was reacting to.
"However, he's got a track record of keeping the stimulus in place so when you've got a market that's positioned ... for euro longs, we're just concerned that there's more downside risk to the euro than upside because it could unwind pretty quick if action doesn't follow the rhetoric," Arnold said.
The single currency's strength pulled the dollar index, which measures the dollar against a basket of currencies, to an eight-day low of 96.846, more than half a percent lower on the day. (DXY)
The greenback recovered some ground against the Japanese yen however, up 0.1 percent at 111.910 yen, and off a five-week high of 112.075 hit in Asian trading.
Investors were awaiting speeches by Federal Reserve officials for signs on whether the central bank will stick to its guns and raise rates this year.
Fed Chair Janet Yellen addresses the British Academy in London at 1700 GMT, less than two hours after an address by Philadelphia Fed President Patrick Harker in the same city at 1515 GMT.
Fed officials have signaled they will look through a slowdown in inflation and continue on their current trajectory of interest rate hikes - though investors are skeptical and market pricing shows only a 40 percent chance of a rise at the Fed's December meeting.
A positive view from Yellen despite a recent batch of weak U.S. economic data would support the Fed's forecast for another rise in policy rates this year.
"A notion increasingly shared in the market ... is that the Fed is continuing to normalize monetary policy regardless of more muted inflation developments," said Manuel Oliveri, currency strategist with Credit Agricole (PA:CAGR) in London.
"This suggests that the market-based rate expectations have additional room of adjusting to the upside should this notion become even a bigger one."
Sterling was up 0.3 percent at $1.2756, staying broadly unchanged after the Bank of England tightened capital controls on banks in Britain.
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