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Euro holds line on dollar, drops against sterling

The euro held modest gains against the dollar and yen on Monday, unperturbed by the weekend referendum in Ukraine in which pro-Russian rebels declared victory in a self-rule vote, further escalating tensions.

Against sterling however, the euro fell to a 16-month low on growing bets the European Central Bank will ease monetary policy just as the Bank of England prepares to raise interest rates.

Dealers said the market had calmed after a turbulent reaction to ECB President Mario Draghi's statement last week that the bank was "comfortable" with easing monetary policy in June.

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Analysts pointed to appearances by some of Draghi's colleagues - most notably Bundesbank chief Jens Weidmann - as possible sources of more clarity on whether the bank is really ready to act.

The euro's gains were trimmed after Austrian central bank chief Ewald Nowotny told reporters it would take more than a cut in interest rates to combat low inflation in the euro zone.

Expectations for a BOE rate increase helped push the yield premium offered by two-year British gilts over euro zone bonds to its biggest since 20008. A BOE quarterly inflation report on Wednesday could include changes to the central bank's interest rate outlook, given Britain's stronger-than-expected economic recovery.

The euro fell as low as about 81 pence, its weakest against sterling since January 2013. Sterling rose about 0.12 percent near $1.68.

However, the euro traded up 0.06 percent against the greenback near $1.38, having tumbled last week from a 2-1/2 year high almost $1.40.

Markets showed little reaction to the Eastern Ukraine voting, which overwhelmingly supported self-rule.

The European Union declared the referendum illegal and increased pressure on Russia on Monday by taking a first step toward extending sanctions to companies, as well as people, linked to Moscow's annexation of Crimea.

The euro edged up 0.24 percent to 140 yen, up from a two-month trough of above 139 yen hit Friday. The dollar rose about 0.25 percent to 102 yen.

--By Reuters

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