* Euro edges up to 1-week high before ECB policy meeting
* Dollar sags as surge in Treasury yields loses momentum
* European shares dragged back by banking results
* Aluminium hits 5-1/2-year high
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Marc Jones
LONDON, Oct 26 (Reuters) - The euro climbed for a third day and stocks slipped to a month low on Thursday, as traders waited for formal confirmation from the European Central Bank that will take its biggest step yet in unwinding years of loose monetary policy.
Banking stocks were also in focus as Europe’s Deutsche Bank <DBKGn.DE > and Barclays both tumbled after results, and South Africa’s markets lurched lower again after its budget on Wednesday had rattled investors.
In a pre-ECB appetiser, Sweden and Norway’s central banks both kept their interest rates on hold. Their currencies barely budged though as attention remained firmly on a euro camped at a 1-week high of $1.1820 and up 12.5 percent for the year.
The ECB will announce its policy decision at 1145 GMT and hold a news conference at 1230 GMT.
It is expected to say that from the start of next year it will be pumping either 30 or 40 billion euros a month into euro zone bond markets, rather than the current rate of 60 billion a month.
Markets will also be looking at how long it plans to maintain that new rate and for any tweak in language on when it may start actually raising its currently negative interest rates.
“The pace they decrease the bond buying is the important factor, I would say they cut (the purchases) by 20 billion (a month) considering how the market is,” said SEB investment management’s global head of asset allocation, Hans Peterson.
“They need to keep the economy going before taking away the punch bowl.”
European bonds, which like other global fixed income markets have seen a selloff over the last week, remained subdued.
Benchmark German Bund yields hovered at just over 0.47 percent after U.S. Treasury yields had hit a seven-month high of 2.4750 percent overnight.
European shares struck 4-week lows too before they managed to steady.
While bank stocks were the main drag, former mobile phone giant Nokia was the biggest individual faller as weak earning from its now mainstay networks equipment business sent its shares down as much as 14 percent.
Elsewhere in currencies, Britain’s sterling built on strong GDP data boost to hit a 9-day high.
The dollar eased 0.2 percent to 113.515 yen after hitting a three-month top. It was also down 0.1 percent against a broader basket of major currencies.
South Africa’s rand was the day’s big mover again though. It dropped another 1 percent after Wednesday’s budget had slashed growth forecasts, ramped up debt projections and reignite fears for its investment grade credit rating.
It left the currency down almost 4 percent and heading for its worst week since the sacking of a respected former finance minister in March.
The Canadian dollar also saw a major shift. It was trying to claw back ground having fallen 1 percent to a three-month low of C$1.2816 per dollar after the Bank of Canada sounded more cautious than of late in its policy statement.
Among commodities, oil slipped a touch following an unexpected increase in U.S. crude inventories and high U.S. production and exports.
Brent crude was down 15 cents at $58.29 a barrel by 0900 GMT. The global benchmark is not far below its 26-month high of $59.49 hit in late September. U.S. light crude was 15 cents lower at $52.03.
Markets have been supported by comments from Saudi Arabia’s energy minister earlier this week reiterating the kingdom’s determination to end a global supply glut that has weighed on prices for more than three years.
Gold drifted higher, but the main metal market mover was aluminium which surged to its highest in more than five years as expectations grew that growing demand and cuts to output from China will squeeze supply.
It reached $2,211 a tonne, the highest since March 2012.
“New price support has emerged in the form of cost inflation,” analysts at Standard Chartered said.
Reporting by Marc Jones; Editing by Toby Chopra