* Weak inflation lifts bets of further ECB policy easing
* European shares slip as Total hurt by Russia
* MSCI Asia erases losses, climbs to 6-1/2 year high
* Fed’s statement could hint at improving labour market
* U.S. GDP report expected to show economy rebounded
By Emelia Sithole-Matarise
LONDON, July 30 (Reuters) - The euro hit an eight-month trough against the dollar on Wednesday and German bond yields were at record lows ahead of inflation data expected to boost the case for further European Central Bank policy easing.
Investors were also awaiting a statement from the Federal Reserve following its policy meeting that some expect to signal a more hawkish policy outlook, and data likely to show the U.S. economy bouncing back strongly in the second quarter.
European shares dipped after French oil major Total was hit by concerns over its investments in Russia following Tuesday’s tightening of European sanctions on Moscow after the downing of an airliner in neighbouring Ukraine.
The euro fell to $1.3395, its lowest since November 2013, before recovering to $1.3400, down around 0.1 percent on the day after data showing Spanish consumer prices fell 0.3 percent in July from a year before.
The surprisingly big fall came even though figures released at the same time showed Spanish economic growth hit its fastest since before the financial crisis in the second quarter.
Traders said that if German inflation data, due at 1200 GMT, also came in below forecast, it would intensify pressure on the ECB to print money to support growth and avert deflation risks.
The ECB cut all its interest rates in June and promised up to 1 trillion euros in cheap long-term loans to banks from September, but kept the door open to a programme of large-scale asset purchases, known as quantitative easing (QE).
“The likelihood that the ECB will need to do QE at the end of the year is sharply increasing,” said Alessandro Giansanti, senior rate strategist at ING.
The contrast between the moribund euro zone economy and an increasingly robust U.S. recovery is one factor in the dollar’s rise this week to a six-month high against a basket of six major currencies. The dollar index was last at 80.225, after touching 81.245 on Tuesday as the euro cratered.
The Commerce Department is expected to report on Wednesday that the economy grew at a 3.2 percent annual pace in the second quarter, after it shrank 2.9 percent in the previous quarter.
Federal Reserve chair Janet Yellen is not due to hold a news conference after the U.S. central bank’s two-day meeting, and the Fed will not update its economic forecasts, leaving a statement scheduled for release at 1800 GMT as investors’ focus.
On Friday, the Labor Department’s key nonfarm payrolls report is expected to show a rise of 231,000 jobs in July after an increase of 288,000 in June. The jobless rate is expected to hold steady at 6.1 percent.
With U.S. unemployment dropping over the last few months and inflation firming, some believe the Fed could adjust its wording to suggest a willingness to hike interest rates sooner rather than later as the bank approaches its “full employment” mandate.
The yield on the benchmark 10-year U.S. Treasury note stood at 2.467 percent, not far from its U.S. close of 2.462 percent on Tuesday, when it got support from German, Italian and Spanish government debt yields hitting record lows.
“That widening yield spread differential is beginning to weigh more heavily on the euro,” said Lee Hardman, a currency economist at the Bank of Tokyo-Mitsubishi UFJ.
European shares bucked the upward trend in Asian markets. French oil major Total slid after saying it had stopped buying shares in Russia’s Novatek on the day a Malaysia Airlines flight was downed over Ukraine.
Last April, Total forecast that Russia would become its biggest source of oil and gas output by 2020 thanks to its partnership with Novatek and their Yamal LNG project in Siberia.
Tuesday brought further European and U.S. sanctions against Russia over Moscow’s support for rebels in eastern Ukraine.
The FTSEurofirst 300 index of top European shares was down 0.2 percent at 1,370.92 points, after gaining 0.3 percent on Tuesday.
Asian shares touched a six-and-half-year peak, with Japan’s Nikkei stock average ending up 0.2 percent, as upbeat earnings offset weaker-than-expected industrial production data which cast doubts over the strength of an expected third-quarter economic recovery.
U.S. crude edged up around 0.1 percent on the day to $101.07 a barrel after touching an intraday low of $100.37 on Tuesday, its lowest since mid-July.
Spot gold was steady at $1,299 an ounce after slipping 0.5 percent and breaking below the key $1,300 level in the previous session. (Additional reporting by Marius Zaharia and Jemima Kelly; Editing by Catherine Evans)