* Euro extends gains after bouncing on report of ECB policy
* Euro zone bond yields at 2-week highs
* Sterling dips below $1.27 to 31-year low
(Recasts, adds details)
By Anirban Nag
LONDON, Oct 5 The euro soared to a five-year
peak against the struggling pound on Wednesday and scaled a
three-week high against the yen, bolstered by rising euro zone
government bond yields.
Euro zone bond yields rose to two-week highs in early trade,
with investors on edge a day after a Bloomberg article cited
sources as saying the central bank would probably wind down its
bond buying gradually before ending quantitative easing.
However, an ECB media officer said in tweet later on Tuesday
that the ECB had not discussed reducing the pace of its monthly
Nevertheless, rising German bund yields saw rate
differentials move in favour of the euro, giving it a leg up so
that it was 0.4 percent higher against the pound at 88.31 pence
, a level last seen five years ago, and at 115.545
yen, its highest in three weeks.
The euro was also 0.2 percent higher against the dollar at
"The headlines that the ECB is considering tapering has led
to some buying in the euro, especially against the yen," said
Yujiro Goto, currency strategist at Nomura. "We do not think the
ECB is anywhere close to tapering its asset purchase programme,
but in the near term momentum is towards euro upside."
The single currency had been kept relatively subdued against
the dollar in the past few months as the ECB has been easing
extensively while the Federal Reserve is poised to raise rates
in coming months.
"It remains to be seen if the report can be substantiated.
But the mood in the market appears to have shifted with the
mention of ECB tapering as it would spell an end to monetary
policy divergence," said Masashi Murata, senior currency
strategist at Brown Brothers Harriman in Tokyo.
The euro's rise saw the dollar retreat from near a two-month
high against a basket of currencies. The greenback had been on a
strong footing after rallying at the start of the week on an
upbeat survey of the U.S. manufacturing sector.
It got an additional lift after Richmond Federal Reserve
President Jeffrey Lacker said on Tuesday there was a strong case
for raising interest rates and as Treasury yields rose to
two-week highs in response to a surge by their euro zone
The dollar index was down 0.15 percent at 96.038,
having risen to 96.442 on Tuesday, its highest since Aug. 9. It
was slightly lower at 102.77 yen after rising to a
three-week high of 102.965 on Tuesday, when it posted its sixth
straight day of gains versus its Japanese peer.
Meanwhile, the sterling fell below $1.27 for the
first time in over three decades amid worries that Britain's
separation from the European Union could be rocky and have
adverse economic consequences.
(additional reporting by Shinichi Saoshiro; Editing by Raissa