* Euro drifting around $1.3600, near four-month trough
* ECB expected to ease policy at its June 5 meeting
* Rate decision due 1145 GMT, news conference at 1230 GMT
By Ian Chua
SYDNEY, June 5 (Reuters) - The euro languished at four-month lows early on Thursday with investors firmly sidelined as they waited to see what measures the European Central Bank would implement to tackle the threat of deflation.
The ECB is widely expected to cut all of its interest rates, which would push the deposit rate into negative territory for the first time. It is also seen offering longer-term loans linked to further lending, but stop short of following the Bank of Japan in launching large-scale asset purchases.
The euro traded at $1.3601, not far from a four-month trough of $1.3585 plumbed on Tuesday. It has slumped almost 3 percent from highs near $1.4000 after ECB President Mario Draghi on May 8 prepared the market for possible policy action at the June 5 review.
“Given market pricing and high expectations for ECB action, the risks of near-term disappointment are not inconsequential,” Marvin Barth, strategist at Barclays in London wrote in a note to clients.
“However, we are confident the ECB will undertake necessary policies to raise inflation from the current worrisome levels. Accordingly, we would recommend fading any post-meeting disappointment that leads the euro to rally.”
The ECB will announce its rate decision at 1145 GMT and President Mario Draghi will give a news conference at 1230 GMT.
With the common currency on the backfoot, the dollar index held near a four-month peak of 80.681 set earlier in the week. It was last at 80.653 .
U.S. data was mixed on Wednesday but still supported views the world’s biggest economy is recovering from a weather-induced slowdown early in the year.
Data from the Institute for Supply Management showed an acceleration in services sector growth, while figures from payrolls processor ADP showed companies hired far fewer workers than expected in May. That could raise the risk of a disappointment in non-farm payrolls on Friday.
The yen, meanwhile, appeared to be stabilising after falling in the past few sessions. The dollar fetched 102.70, having gained more than 1 percent since Friday, while the euro bought 139.65 following a 1.2 percent rally from 137.98 a week ago.
Traders said the expiry of large options in dollar/yen this week could keep the spot market subdued.
Also looking at the prospect of a quiet session is the Australian dollar, which appeared to be capped around the 93 U.S. cent mark for now.
Upbeat data this week showing Australia posted its fastest growth in two years last quarter and a central bank that is on hold for what is likely to be an extended period have propped up the Aussie.
But repeated attempts to break above 93 cents have been met with good selling interest, suggesting the Aussie would probably need a stronger reason to rally. It was last at $0.9278.
There is little in the way of economic news out of Asia to distract markets from the ECB. Australia’s trade data is due at 0130 GMT, followed by a private survey on China’s services sector expected around 0145 GMT. (Editing by Shri Navaratnam)