FOREX-Swedish crown hits 3-1/2 yr low after hefty rate cut, Aussie weak
* Swedish crown sinks after rate cut, drags Norwegian crown too
* Dollar index holds above recent 8-week low
* Focus on U.S. payrolls data after strong ADP report
* Aussie dollar falls after RBA's Stevens warns on currency (Updates after ECB decision)
By Anirban Nag
LONDON, July 3 (Reuters) - The Swedish crown fell to a 3-1/2-year low against the euro on Thursday as the central bank cut rates more than expected, while Australia's dollar lost ground after the head of its central bank warned the currency could weaken.
The 50-basis-point-cut by the Riksbank was double what was expected and kept the market focus on the crown in an otherwise quiet session, with investors awaiting key U.S. jobs data.
The European Central Bank kept its policy unchanged as expected, putting the focus on President Mario Draghi's news conference.
Strong figures from payrolls processor ADP on Wednesday supported the view that the U.S. economy has bounced back after a first-quarter slump.
That helped drive benchmark U.S. Treasury yields to their highest in over a week at 2.63 percent on Wednesday, which in turned supported the dollar against a basket of major currencies.
Yields could rise further if Thursday's jobs data beats expectations. The dollar was up 0.1 percent against the yen at 101.90 yen and firmer against the Swiss franc.
The euro barely reacted to the ECB decision, trading slightly lower at $1.3650, with investors cautious before Draghi's post-meeting news conference. It is due to start just as the U.S. jobs numbers are released at 1230 GMT.
After cutting interest rates to record lows and revealing a 400 billion-euro loan programme last month, the ECB is not expected to take fresh policy action this time.
"Yet with inflation so low at 0.5 percent, year-on-year, we find it unlikely President Draghi will be happy to say nothing and allow euro/dollar to stage another assault on $1.40 again," said Chris Turner, head of currency strategy at ING.
"Short-term rate spreads suggest euro/dollar should be trading closer to $1.34 than $1.37."
SWEDISH CROWN, AUSSIE STUNG
The Riksbank surprised a market that was expecting only a 25 basis point cut in the repo rate, and the Swedish crown fell to its lowest since November 2010 against the euro.
The euro rose to 9.39 crowns, from around 9.1950 crowns before the rate decision. It was last trading at 9.3274 crowns, up 1.8 percent on the day.
The Swedish crown's drop led to a sell-off in the Norwegian crown too. It sank to a 2014 low against the euro with the single currency hitting a peak of 8.53 crowns, its highest since December 2013. Both currencies saw a surge in trading volumes on the Reuters Dealing platforms.
"Nordic central banks will now strive to keep their currencies weak and support inflation expectations so there is not much value in looking at longs," said Geoff Yu, currency strategist at UBS. He recommended investors to stay underweight on both currencies.
Another big mover was the Australian dollar which extended losses to trade 0.7 percent lower $0.9380.
It retreated from the eight-month peak of $0.9505 set on Tuesday after Reserve Bank of Australia Governor Glenn Stevens warned that investors were underestimating the risk of a significant fall in the currency.
A weak reading on Australian retail sales added to the already soft tone of the Aussie dollar, which had retreated on Wednesday on profit-taking in the wake of disappointing trade data. (Editing by John Stonestreet and Hugh Lawson)