* Bunds fall, euro rises as ECB stands pat on policy
* Money market rates rise as ECB bets doused
* Diplomatic talks on Ukraine also weigh on Bunds
By Emelia Sithole-Matarise
LONDON, March 6 (Reuters) - German government bond yields rose and the euro hit a 10-week high against the dollar on Thursday after the European Central Bank took no fresh steps to ease monetary policy in the face of persistently low inflation.
ECB President Mario Draghi said the bank did not take action at its monthly meeting because economic and monetary conditions had not changed enough to warrant it.
A mooted suspension of the ECB’s weekly operations to soak up money it spent on sovereign bonds at the height of the debt crisis did not materialise either, disappointing those who had expected the bank to act to ward off potential deflation.
The ECB’s stance accelerated a rise in top-rated euro zone bond yields that was triggered earlier by easing geopolitical tensions as talks to resolve the crisis in Ukraine continued.
German two-year bond yields, the most sensitive to shifts in interest rate expectations, rose 4 bps to a six-week high of 0.16 percent while 10-year yields were up 5 bps at 1.65 percent.
Money market rates implied by Euribor futures in 2014 to 2017 rose by 3 to 7 basis points.
“Draghi delivered little impetus to support expectations that maybe some kind of policy easing will be due in the next few months or so,” said Rainer Guntermann, a strategist at Commerzbank in Frankfurt.
“We would need either significant data disappointment or surprises on the inflation front (for the ECB to ease policy further).”
In the forward interest rate market, euro overnight lending rates for this year rose by up to 3 bps after Draghi’s comments as traders scaled back predictions of further action.
The Eonia strip remained slightly inverted, with October Eonia still below the spot rate of 0.157 percent and slightly lower than May to August rates, reflecting a small probability of a further policy move from the ECB.
“At the moment the market will probably take a more neutral stance on the odds of policy easing at least over the next few months,” Guntermann said.
The euro rose to a 10-week high of $1.3844 and a seven-week high against the yen as investors who had gone short on the euro, expecting some sort of monetary easing by the ECB, were forced to buy back and cover those positions.
“There was also no change to the sterilisation of SMP,” said Citi strategist Valentin Marinov. “All that should be seen as euro positive. Euro/dollar, euro/yen and euro/Swiss franc could do well.”
In the options market, one-month euro/dollar risk reversals - a gauge of demand for options betting on a currency rising or falling - were showing a lesser bias towards euro weakness in the coming weeks.