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FOREX-Euro dives to 3-week low after ECB points to overshoot

* ECB minutes reveal concerns over currency overshoot

* Dollar erases most losses

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

LONDON, Aug 17 (Reuters) - The euro sank to a three-week low below $1.17 on Thursday after minutes from the European Central Bank's July policy meeting showed officials warning about a possible market overshoot after six months of gains.

The minutes, released at 1130 GMT just as U.S. investors were coming online, spurred an almost 1 percent fall in the single currency against the dollar along with losses against the Swiss franc, yen and sterling.

The minutes showed rate-setters were highly aware of the risk that the euro could threaten the ECB's efforts to get inflation higher as they decided against any change to their pledge of continued monetary stimulus last month.

"The reality is the ECB is definitely more concerned than the market gave it credit for," said Simon Derrick, chief market analyst with Bank of New York Mellon in London.

"I think it is entirely possible you could see further downward pressure on the euro from here."

The dollar had already been gaining strongly ahead of the ECB release, recovering from overnight losses to gain 0.4 percent against a broad trade-weighted basket of its rivals .

"It is very difficult to ignore much higher U.S. yields relative to G7 peers for any sustained period and the market has got itself rather too short on the dollar," said Marc Ostwald, global strategist at ADM ISI in London.

Yields on benchmark two-year U.S. Treasury yields are up five basis points over the last week. The gap between those yields and corresponding German debt has widened to more than 200 basis points in recent weeks.

The dollar's bounce also came after pressure over the last 24 hours due to worries over U.S. President Donald Trump's ability to implement economic policy after he disbanded two high-profile business advisory councils.

The falls for the euro - and the ECB's concern over its impact on the outlook for inflation - follow a 13 percent gain in the first seven months of 2017 that made it the best performing of the G10 group of major developed world currencies.

It is down 2 percent from a high of 1.1910 at the start of August.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Reporting by Saikat Chatterjee; additional reporting by Patrick Graham; editing by Andrew Roche)