FOREX-Euro blips higher on ECB rate decision, eyes on Draghi

Reuters

* All eyes on news conference after ECB holds rates

* Rate decision gives brief support to euro

* Aussie spikes after data supports steady rates outlook

By Patrick Graham

LONDON, March 6 (Reuters) - The euro inched higher on Thursday as the European Central Bank kept interest rates on hold, shaking out some bets of a cut in base rates to support euro zone growth and weaken returns on the single currency versus its peers.

The decision may not be the end of the story on ECB policy for the day. While some in the market had backed it to announce a 10 basis point cut in its main interest rates at 1245 GMT, others think it will take more technical steps to tweak the volumes of cash it has set flowing through the banking system to prop up lending and investment.

That puts the onus on a news conference by President Mario Draghi starting at 1330 GMT. The euro hit a high for the day of $1.3778 after the rate decision before retreating. It was up just over 0.1 percent on the day.

"What Draghi has said at recent news conferences has tended to push the euro higher but there is still a body of thought that they might do something, so it is going to be a closely-watched statement today," said a currency dealer with one large U.S. bank in London.

"My money remains that they do nothing."

An ECB source told Reuters at the start of this week that there would be unanimous agreement to end efforts to remove the extra liquidity resulting from bond purchases the bank has made as part of efforts to ease the euro zone's debt crisis.

The euro has performed robustly against the dollar so far this year, confounding predictions by many banks it would fall on the prospect of further loosening by the ECB at a time when the U.S. Federal Reserve is going in the opposite direction.

Simon Derrick, strategist at Bank of New York Mellon in London, said one element in the euro's strength had clearly been the higher returns offered by peripheral euro zone bonds.

Any move to raise liquidity in the banking sector should reduce returns overall but yields on government securities in Spain or Italy are still well above what investors can get in the United States or Japan.

That makes it less likely that any tweak to policy would prove a watershed moment for the single currency.

"It is still the case that one of the few places investors can pick up any kind of yield at all is in the euro zone periphery," Derrick said.

"The news conference has the potential to be one of the more interesting we have seen for a while."

AUSSIE RETURN?

The Australian dollar spiked to a nine-day high after upbeat retail sales and trade data. It has gained 3.5 percent since bottoming out in January after a sustained campaign by the Reserve Bank to weaken the currency.

The Aussie's fall was one of the dependable plays of late 2013 but the central bank changed its tune on the currency last month as more signs emerged that growth was improving.

"The Aussie is seeing a change in behaviour as the data gets better," said Derrick. "One thing that would really surprise some people from here would be a move up in the Aussie, there is a real chance this will catch a lot of people the wrong way round."

The Aussie gained more than half a percent to a one-week high of around $0.9060.

Major currency markets have been pretty resistant to the geopolitical tensions stemming from a standoff between Russia and Ukraine but another day of relative quiet in the Crimea helped both the euro and dollar gain against the yen.

The yen fell to a six-week low against the euro and was near a two-week trough against the dollar, with traders citing steady selling after advisors to Japan's $1.26 trillion public pension fund said the fund need not cling on to the safety of Japanese government bonds.

"The rally in the Nikkei was a contributing factor, but the move was also prompted by headlines that the GPIF advisory panel's draft report said there was no need to stick to a JGB-centric portfolio," Adam Cole head of G10 currency strategy at RBC Capital.

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