FOREX-Euro falls as market turns to ECB meeting

* All eyes on ECB meeting; policy decision at 1245 GMT

* Euro falls as traders square positions

* Dollar recovers slightly after hitting two-week low

* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

By Tommy Wilkes

LONDON, March 8 (Reuters) - The euro fell on Thursday as the dollar recovered and traders reduced their positions before a European Central Bank meeting later in the day where it could signal some baby steps towards ending monetary stimulus.

All eyes will be on the ECB for clues about the speed and timing of monetary tightening and any signs it is starting to grow uncomfortable with the currency's strength. The euro trade-weighted index this week hit its highest since September 2014.

After rising sharply at the start of the year to hit a three-year high of $1.2556 in February, the euro has been stuck in a range in recent weeks as the dollar alternately rose and sold off depending on global risk appetite.

Investors pushed the euro higher on expectations that the ECB, which is expected to keep monetary policy unchanged on Thursday, will drop signals on how it plans to gradually rein in its huge stimulus programme.

"There is a lot of position squaring ahead of the ECB," said Manuel Oliveri, FX Strategist at Credit Agricole (Swiss: ACA.SW - news) .

"Some expect that the ECB could end its easing bias but it's not clear. But there is very very very little risk of an (ECB) dovish announcement ... Ultimately they will remove the easing bias," Oliveri said, recommending buying the euro on dips.

After earlier trading flat, the euro fell back 0.3 percent to $1.2377 as the dollar staged a recovery.

The dollar rose 0.2 percent against a basket of major currencies at 89.800 after pulling away from a two-week trough of 89.407 the previous day.

Viraj Patel, a currencies analyst at ING, expects a subtle change in the ECB's forward guidance that will remain broadly supportive for the euro, with a "potential test of $1.25 on the cards".

"We'll be looking to infer what role the global external environment (stock market volatility and U.S. protectionism) is playing," he said.

DOLLAR RECOVERY

The greenback had weakened sharply following the resignation on Tuesday of Gary Cohn, the top economic adviser to the White House who was seen as seen as a bulwark against protectionism in President Donald Trump's administration.

Broader financial markets grew calmer, with Wall Street paring losses overnight. Some dealers have traded on the possibility that the tariff threat was a negotiating ploy in trade talks with U.S. neighbours.

The dollar's recovery was stoked by Wednesday's data on U.S. private hiring and labour costs that reinforced the view of underlying strength in the economy.

While worries about U.S. tariffs may have eased somewhat, the dollar's recovery was limited as fears of trade conflicts lingered, with Trump seen sticking to a protectionist stance in the longer run.

With (Other OTC: WWTH - news) the dollar rising in London trading on Thursday, the Canadian dollar fell back. It had weakened on Wednesday to C$1.3002 on Wednesday before recovering on the prospect that Trump's tariffs may exempt Canada and Mexico.

The Mexican peso was at 18.71 pesos per dollar following a recovery from 18.90 touched on Wednesday.

The Hong Kong dollar fell to a 33-year low, at 7.85 per U.S. dollar. The Hong Kong Monetary Authority said on Thursday it had no immediate plans to issue bills to prop up the local currency.

(Editing by John Stonestreet and Andrew Heavens)