* Euro heads back towards Wednesday's low $1.0565
* ECB rate talk pushes short-term interest rates to record
low
* Market activity thinned by U.S. Thanksgiving holiday
* Brent crude futures fall, copper prices rebound
(Updates price action, adds comment)
By Dhara Ranasinghe
LONDON, Nov 26 (Reuters) - The euro slipped back towards
seven-month lows, bond yields fell and European shares rallied
on Thursday as talk of aggressive stimulus from the European
Central Bank next week gained ground.
The pan-European FTSEurofirst 300 index .FTEU3 rose 0.8
percent, adding to Wednesday's 1.4 percent gain, while the Euro
STOXX 50 index .STOXX50E was up 1.2 percent.
The firm gains came as Wall Street shares closed flat
overnight in a pre-Thanksgiving holiday lull and Asian stocks
closed modestly higher. MSCI's broadest index of Asia-Pacific
shares outside Japan .MIAPJ0000PUS rose 0.5 percent.
"Expectations surrounding the ECB are running very high and
this is driving European markets higher, weakening the euro and
helping them do better than U.S. stocks," said Marco Vailati,
head of research and investment at Italy's Cassa Lombarda.
"I think and hope the ECB will not disappoint but I realise
that it won't be that easy," he said.
Euro zone central bank officials are considering options
such as staggered charges on banks hoarding cash and buying more
debt ahead of next week's ECB meeting, Reuters reported on
Wednesday. ID:nL8N13I42U
That fueled talk that the central bank is getting ready for
aggressive measures to lift inflation and economic growth in the
19-member euro zone.
HOW LOW FOR EURO?
Against this backdrop, the euro remained on the back foot,
dipping 0.15 percent to $1.0626 EUR= . It tumbled on Wednesday
to $1.0565, its lowest level since mid-April, before recovering.
Against the yen, the euro fell 0.2 percent to 130.12 yen, having
hit a 7-month low of 129.77 EURJPY=R on Wednesday.
Overall market activity was thin due to the holiday in the
United States.
"Ultimately, I think the ECB will be aggressive and that
divergence in policy with the United States must imply a weaker
euro," said Chris Scicluna, head of economic research at Daiwa
Capital Markets in London.
"The question now is how far can we go, and as the Fed
tightens, euro/dollar parity is looking likely by the second
quarter of next year."
Euro zone lending expanded at its fastest rate in nearly
four years in October while a broader measure of money
circulating grew well ahead of expectations, data from the ECB
showed on Thursday.
Still, banks continue to park around 160 billion euros in
overnight deposits with the ECB, indicating that even negative
rates and extraordinary monetary stimulus has not unblocked the
lending channel. ID:nF9N0Z100W
Short-term euro zone interest rates fell to record lows as
markets interpreted an ECB debate about two-tier deposit rates
as signaling the intention for an aggressive cut.
ECB easing expectations also pushed German five-year
government bond yields DE5YT=TWEB to a new record low of
-0.196 percent, while two-year yields DE2YT=TWEB hovered just
above lows of -0.418 percent.
Expectations for a divergence in monetary policy meanwhile
rose after U.S. economic data on Wednesday cemented expectations
that U.S. interest rates will rise soon, helping push the gap
between short-dated bond yields in the U.S. and Germany to their
widest since 2006 and underpinning the dollar.
OIL LOWER, COPPER REBOUNDS
Oil prices fell, after six days of gains, as concerns that
escalating violence in the Middle East would disrupt supply
faded, and the focus returned to a persistent market glut. O/R
Brent LCOc1 crude oil futures were down 0.9 percent at
$45.75 a barrel.
Spot gold XAU= was little changed at $1,071.65 an ounce,
hovering close to its lowest in nearly six years on the back of
a firmer dollar and expectations for higher U.S. interest rates.
Copper prices CMCU3 bounced to their highest in nearly two
weeks, helped by funds starting to reverse some of their bets on
lower prices. The metal has been hit hard in recent weeks by
dollar strength.
Elsewhere, Turkish assets remained under pressure as a
dispute with Russia over its downed jet rumbled on, but other
emerging equities edged up, snapping a three-day losing streak.
Emerging stocks .MSCIEF were last up about 0.25 percent.