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Euro steadies as all eyes on ECB policy meeting

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The single currency gains 4% this week

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U.S. dollar index hovers at 4-month lows

(Updates for midday European trading)

By Yadarisa Shabong

March 6 (Reuters) - The euro steadied after hitting a

four-month high against the dollar on Thursday as traders brace

for the European Central Bank's rate decision and outlook

against the backdrop of rising yields after Germany's historic

debt overhaul.

The euro was little changed after earlier scaling

to $1.0822 for the first time since November 7.

The shared currency has gained 4% so far this week, set for

its biggest weekly jump since March 2020.

A quarter-point rate cut is widely expected from the ECB's

policy decision later in the day. But the focus will be on the

scope and pace of easing beyond that, and ECB President

Christine Lagarde's comments about the sharp rally in government

debt yields.

"German yields have rallied, but so have French yields and

Italian yields and France and Italy have their sustainability

issues," said Nick Rees, head of macro research at Monex Europe.

"Now at some point, that story comes back to the fore and

markets start to worry about euro zone fragmentation and that

really puts a cap on the level to which euro/dollar can rise."

What Lagarde says about the ECB's "willingness to step in

and intervene if this becomes a risk of blowing something up"

will be crucial, Rees said.

The dollar index, which measures the greenback against six

peers, is on a four-day losing streak and wallowed at its lowest

since November 6, when U.S. President Donald Trump won the

election, as worries of a U.S. slowdown lingered amid trade

tensions.

"It is hard to step into the bullish EUR momentum and call

for a pause to the rally," Barclays analysts said in a note.

"It is clear that in the case of a deepening US slowdown,

ongoing good news from Europe and noisy US tariff policy could

add fuel to the fire," they added.

Trump's administration, which has slapped tariffs on Canada,

Mexico and China, gave a one-month reprieve on auto import

levies to its nearest neighbours, again showing how rapidly the

trade landscape can shift.

The U.S. currency rose 0.15% to C$1.4366 and was up

0.3% at 20.47 Mexican pesos.

"U.S. trade policy remains the biggest uncertainty for the

markets," said Kyle Rodda, senior financial markets analyst at

Capital.com.

WORRIES OVER U.S. GROWTH

Rees said that the market is too worried about U.S. growth,

when the "hard data" is not even out yet. U.S. nonfarm payrolls

data is due to be released on Friday.

Barclays analysts said should U.S. data stabilise, "the bulk

of the EUR rally" may be over.

The dollar fell 0.7% to 147.9 yen. Japan's largest

labour union group Rengo said on Thursday its member unions were

seeking an average wage hike of 6.09% for this year.

"We do not expect any upswing in wage agreement to be

substantially large enough to warrant an earlier rate hike by

the Bank of Japan," Goldman Sachs analysts said in a note.

The U.S. currency edged up 0.2% to 7.2345 yuan in the

official market, but that was after falling 0.7% over

the previous two sessions.

Beijing began its week-long annual parliamentary meeting of

the National People's Congress on Wednesday by signalling

greater efforts to boost consumption to help protect economic

growth at a time of heightened trade tensions with the United

States.

The Swedish Crown strengthened on the dollar and euro after

Sweden's headline inflation surged, signalling an end to rate

cut prospects in the near term.

The crown hit its highest since December 2022 at 10.994 per

euro.

The British pound weakened against the euro as traders

continued to pile on the common currency following Germany's

proposed fiscal stimulus.