4 Min Read
* Eyes on ECB to clarify economic outlook, no rate cut seen
* Euro hits 4-week high vs dollar at $1.3131
* Worries remain on future of Fed stimulus
* European shares recover ground after recent sharp losses
By Richard Hubbard
LONDON, June 6 (Reuters) - The euro hit a four-week high against the dollar on Thursday as investors positioned for the European Central Bank to leave rates unchanged, but uncertainty over the U.S. Federal Reserve's next move kept equity markets on edge.
The ECB cut its main interest rate to a record low 0.5 percent in May and was seen sitting tight as it waits for further evidence of an economic recovery it has predicted will emerge in the second half of the year.
That means the main focus will be President Mario Draghi's news conference which follows Thursday's policy meeting, when he is likely to trim the bank's economic forecasts and be questioned on the future direction of policy.
"We think he (Draghi) will keep the door open for more easing but it's not the time to do it today," said Piet Lammens, a strategist at KBC in Brussels.
The stronger conviction for no change in policy followed data suggesting the downturn across the region is starting to ease, encouraging traders to push the euro up to $1.3131, its highest level since May 9 and up 0.3 percent on the day.
The euro's rise dragged the dollar index to a four-week low of 82.39. The U.S. currency also hit a four-week low of 98.86 yen earlier on Thursday, though it then recovered to trade at 99.25 yen, up 0.2 percent.
"The dollar's longer-term bullish outlook remains intact as the Fed will eventually start scaling down its stimulus if jobs continue to be added, while the Bank of Japan will expand its monetary base," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.
Meanwhile another central bank, the Bank of England, is also widely expected to leave its policies on hold at the conclusion of its final policy meeting under current Governor Mervyn King on Thursday.
UK data on manufacturing, services and construction sectors have all pointed to a pick-up in activity, tempering expectations that the new governor, Mark Carney, who takes over in July, will turn to aggressive monetary easing in the near term.
As long as there are no surprises from either the ECB or the Bank of England, the market's focus is likely to quickly switch to Friday's U.S. non-farm payrolls report which could determine when the Federal Reserve begins tapering its bond-buying.
A strong jobs report would add to speculation the Fed could begin cutting back its $85 billion a month bond-buying programme before the end of the year, putting pressure on all riskier asset markets.
Fears about this have seen the broad FTSEurofirst 300 index shed nearly 10 percent over the past nine trading days, although it recovered slightly on Thursday to be up 0.2 percent by mid-morning. London's FTSE 100, and Frankfurt's DAX were around 0.1 to 0.3 percent firmer.
Earlier, another volatile session for Japan's Nikkei index, which ended below 13,000 for the first time in two months, undermined Asian markets, sending them to fresh 2013 lows and leaving MSCI's world equity index little changed.
In fixed income, German Bund prices drew support from the expectations the ECB will keep monetary policy ultra-easy and from the Fed uncertainty but stayed within narrow ranges.
Fresh bond auctions by Spain and France during the morning met good demand from yield-hungry investors but both saw a slight rise in yields, reflecting the doubts about the Fed's future stimulus policies.
Oil prices were caught between the worries about the Fed cutting back on monetary easing and evidence of a big drop in U.S. oil stocks, leaving Brent crude steady at around $103 a barrel.
"The market direction will depend a lot on what the (U.S.) jobs data shows," said Victor Shum, vice-president of energy consultancy IHS Energy Insight. "But overall, I am bearish on prices because supplies are ahead of demand."