The dollar gave back some of its overnight gains against the euro on Tuesday after hitting a 10-day high ahead of this week's European Central Bank meeting, which some investors believe could set the stage for additional stimulus later this year. The Canadian dollar, meanwhile, edged lower against its U.S. counterpart after Liberal leader Justin Trudeau won a stunning election victory over Prime Minister Stephen Harper's Conservatives. The euro inched up slightly to $1.1331 EUR=, after dropping as low as $1.1306 on Monday, but its gains were seen limited ahead of Thursday's ECB meeting as it comes against a backdrop of deflationary pressure. Lower oil prices helped push euro zone consumer prices into negative territory last month, which some believe could prompt the ECB to eventually expand or extend its asset purchase program. Many economists believe such a move would be most likely to come in December if the ECB's quarterly economic forecasts due early that month prove disappointing. Economists polled by Reuters expect the ECB to extend its plan to buy 60 billion euros of assets a month of mostly government bonds beyond its planned end-date of September 2016. "We're thinking they'll probably extend that date, but we're not expecting it until the December meeting," Jennifer Vail, head of fixed-income research at U.S. Bank Wealth Management in Portland, Oregon, said by phone. "The extension is the most likely path for the ECB. I think increasing the size of current purchases would be problematic," she said. After the ECB, investors' main focus will be the U.S. Federal Reserve's policy meeting on Oct. 27-28. [FED/DIARY] Investors remain divided about whether the U.S. central bank will deliver its first rate hike since 2006. Interest rate futures indicated on Monday that traders were pricing in a 52 percent chance of the Fed raising rates in March 2016, according to the CME Group FedWatch. Fed officials have been sending mixed messages to markets in recent weeks. Chair Janet Yellen and others have said they expect a rate hike will be needed by the end of this year, while some other officials have expressed caution in light of looming risks that a slowing global economy could threaten the U.S. outlook. "I do see the time to start raising rates in the near future, from my perspective," San Francisco Fed President John Williams said in an interview on Bloomberg TV on Monday. The yen was treading water in its recent ranges, as investors pondered whether or not the Bank of Japan would take or signal further stimulus steps later this month to bolster the flagging economic recovery. The dollar was buying 119.48 yen JPY=, nearly unchanged from late U.S. trade. The dollar index, which tracks the U.S. unit against a basket of six rival currencies, was slightly lower at 94.898 .DXY, though still well away from last week's seven-week low of 93.806. In Canada, Trudeau has pledged spend on infrastructure to stimulate economic growth. He has also vowed to raise taxes on high-income Canadians and reduce them for the middle class. The dollar was last up about 0.2 percent against the loonie at C$1.3037 CAD=D4. "Once you leave that Canadian time zone, there's not a lot of people seriously following the small nuances of economic policy," said Bart Wakabayashi, head of foreign exchange for State Street Global Markets in Tokyo. "The hype is much more than the bite, but it's obviously headlines to trade off. I think we'll continue to trade Canada as a commodities currency more than any other factor," Wakabayashi said. "It wasn't that long ago that we were at par, and if you look back and compare charts, it's pretty much all about commodities and oil, so that link is very hard to shake off and will continue to dominate dollar/CAD direction." Oil prices rebounded on Tuesday as traders covered short positions after prices fell at least 3 percent in the previous session. [O/R]
