FOREX-Euro on the defensive as ECB easing bets grow

* Dollar benefits as fresh ECB easing prospects hit euro

* Trading subdued with U.S (Other OTC: UBGXF - news) . markets shut for Thanksgiving (adds quotes, details)

By Anirban Nag

LONDON, Nov 26 (Reuters) - The euro fell back towards seven-month lows against the dollar and shed ground against the yen on Thursday as investors piled on bets against it, confident that the European Central Bank will ease monetary policy again next week.

In the United States, investors largely squared their positions on Wednesday in preparation for Thanksgiving and will remain largely inactive on Friday, keeping volumes rather low and ranges tight going into the weekend.

Nevertheless, the gap between yields on two-year U.S. and German government debt reached its widest since November 2006, reflecting the diverging monetary policy outlooks of the Federal Reserve and the ECB and making the dollar more attractive to investors.

The euro was down 0.2 percent at $1.0605, having skidded on Wednesday to $1.0565, its lowest since mid-April (LSE: 0N69.L - news) , before recovering. Against the yen, it was trading 0.2 percent lower at 130 yen, having hit a 7-month low of 129.77 on Wednesday before similarly picking back up.

The euro's move down picked up pace after ECB officials told Reuters they were considering options such as whether to stagger charges on banks hoarding cash or to buy more debt.

The ECB meets next week and most in the market expect it to increase its asset purchase programme and lower its deposit rate, the rate at which banks park excess funds with it, from the current -0.2 percent to boost inflation.

"The market's hope for a deeper deposit rate cut have got a lift after the Reuters report. It (Other OTC: ITGL - news) is very difficult to buy the euro ahead of the ECB meeting next week. So downside risks for the euro falling below $1.05 are rising," said Yujiro Goto, currency analyst at Nomura.

The dollar was also being helped by upbeat U.S. data which bolstered expectations of a rate hike in December.

The dollar index was slightly higher at 99.856 after scaling an 8-1/2-month peak of 100.170 following strong U.S. manufacturing output and business investment plan numbers on Wednesday that reinforced the case for the Federal Reserve to raise interest rates.

"Our key message of general dollar strength remains intact and we do not subscribe to the consensus view of a dovish Fed rate hike leading the way for a broad dollar correction as seen in all three previous cases when the Fed starting to hike rates in 1994, 1999, 2004," Morgan Stanley (Xetra: 885836 - news) said in a note.

"It will be the repatriation of dollars driving markets in the medium term. Positioning for the magnitude of projected US rate hikes may be important for timing and tactical trading, but the dollar trend will be decided in Asia." (Editing by Hugh Lawson)