* Euro drops sharply as ECB treads edges up to 1-week high before European stocks see biggest rise in over six-week
* Dollar rises on reports Yellen out of Fed chair
* 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 and bond yields fell on Thursday and stocks rose as the European Central Bank proceeded with caution with its biggest step yet in unwinding years of loose monetary policy.
The euro skidded almost half a percent to back below $1.18 after the ECB said it was halving its stimulus to 30 billion euros a month, but made clear that any rise in interest rates remained way off in the distance.
Moves were then compounded by reports that Janet Yellen was no longer in the running for an extension to her Fed term as Wall Street traders also began to digest a heavy dump of tech earnings firm earnings.
Nasdaq futures pointed to a flat start but those for both the S&P 500 and Dow Jones were higher as the ECB moves bolstered what was set to be the strongest day in more than six weeks for European stocks.
The ECB had taken a leaf out of the Fed’s book by also promising to keep reinvesting the proceeds from the 2.4 trillion euros worth of bonds it has hoovered up since early 2015.
“Mario Draghi has once again stressed that the ECB will maintain a very gradual approach to its monetary policy, and that short term rates will not rise before well after purchases have been stopped,” said Julien-Pierre Nouen, Chief Economic Strategist at Lazard Frères Gestion.
In a pre-ECB appetiser, Sweden and Norway’s central banks had both kept their interest rates on hold. Their currencies barely budged, though, as attention remained firmly on the ECB and the euro zone.
European bonds, which like other global fixed income markets have seen a selloff over the last week, rallied. The yield on Germany’s 10-year government bond was down 4 basis points on the day at 0.44 percent. Longer 30-year Italian yields hit their lowest in a month.
That was after U.S. Treasury yields had hit a seven-month high of 2.4750 percent overnight.
Elsewhere in currencies, Britain’s sterling built on strong GDP data boost to hit a 9-day high before the revitalised dollar struck back.
The greenback steadied at 113.840 yen after hitting a three-month top overnight. 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 9 cents at $58.36 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 crept up to $52.22.
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 down, having started the session lower 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 $2,215 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 Mark Heinrich