(Fixes typo in final paragraph)
* 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 and Masayuki Kitano
SYDNEY/SINGAPORE, June 5 (Reuters) - The euro languished near four-month lows 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 interest rates, putting the deposit rate into negative territory for the first time. It is also seen offering longer-term loans linked to further lending, without launching large-scale asset purchases as the Bank of Japan has done.
The euro held steady on the day at $1.3598, not far from a four-month trough of $1.35855 plumbed on Tuesday on trading platform EBS. 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.
“You’re likely to see pretty large swings in the spot price today on the back of the ECB statement and also the press conference,” said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.
The euro may end up rising over the next few days unless the ECB surprises the market by embarking on large-scale asset purchases, also known as quantitative easing (QE), he added.
“In terms of direction, our base case is, unless you see QE, the risk is of a bounce in euro,” Henderson said.
The ECB will announce its rate decision at 1145 GMT and President Mario Draghi will give a news conference at 1230 GMT.
“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.”
With the common currency on the back foot, the dollar index held near a four-month peak of 80.681 set earlier in the week. It was last at 80.649 .
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 eased 0.2 percent to about 102.57 yen, down slightly from a one-month high of 102.80 yen set on Wednesday.
The dollar has gained a lift versus the yen over the past several days as the benchmark U.S. 10-year Treasury yield pulled up from an 11-month low touched last week, helping to bolster the greenback’s appeal.
News this week that Japan’s Dai-ichi Life Insurance Co has agreed to buy U.S. peer Protective Life for $5.7 billion in the largest acquisition by a Japanese insurer, also held the attention of traders.
Some traders may have bought dollars in anticipation that the deal would pressure the greenback higher, in which case they could now be looking to book profits, said a trader for a Japanese bank in Singapore. (Editing by Simon Cameron-Moore)