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FOREX-Canadian dlr jolted by rate cut shock; ECB looms large for euro

* Canadian dollar worst performer among major currencies

* BOC surprise rate cut knocks CAD to near six-year lows

* Other dollar bloc peers also under pressure

* ECB next major focus; QE details crucial to outlook for euro

By Ian Chua

SYDNEY, Jan 22 (Reuters) – The Canadian dollar languished at its lowest in nearly six years early on Thursday, having suffered a massive drop after the Bank of Canada stunned markets by cutting interest rates.

The surprise easing came as the European Central Bank is widely expected to launch a large-scale sovereign bond-buying program.

The BOC lowered its overnight rate to 0.75 percent from 1 percent “to provide insurance” against the risks of financial instability and lower inflation after a slump in oil prices.

The Canadian dollar skidded almost 2 percent – its biggest one-day drop since November 2011 – to as far as $ 1.2420 per U.S. dollar, reaching a low not seen since early 2009. It last stood at C$ 1.2325.

The BOC was just the latest central bank to wrong foot markets, following the Swiss National Bank’s decision last week to suddenly abandon its three-year-old currency cap.

The other dollar bloc currencies also sold off and investors speculated Australia’s central bank might also cut soon, not least to keep the Aussie dollar from strengthening.

The Australian dollar slid to $ 0.8093, nearing a five-year trough of $ 0.8033 set earlier in the month. Its New Zealand peer tumbled to its lowest in over two years at $ 0.7555 .

The other major currencies saw less action with the euro firming to $ 1.1613, from a session low of $ 1.1542, as the market trimmed short positions into the ECB meeting.

Since reaching an 11-year trough of $ 1.14595 on Friday, the common currency has been drifting in a slim range as investors wait to see how aggressive the central bank might be.

A euro zone source said on Wednesday the ECB’s Executive Board has proposed a program that would enable the bank to buy 50 billion euros ($ 58.05 billion) in bonds per month starting in March, and could last up to two years.

Whatever the outcome, traders said there is sure to be plenty of volatility in euro/dollar.

“And given extreme levels of positioning as revealed both anecdotally and in IMM data, we prefer to watch this from the sidelines,” said Nick Parsons, global co-head of FX strategy at National Australia Bank.

“We’ve exited our short position, established at 1.2435, at 1.1555.”

The yen, meanwhile, held its ground against both the dollar and euro. The dollar was back at 117.85, having reversed all of Tuesday’s gains.

The euro eased to 136.86 yen from this week’s high of 137.645, losing a bit of steam after a rebound from a three-month trough of 134.70. ($ 1 = 0.8614 euros) (Editing by Lisa Shumaker)

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