FOREX-Euro eases but holds above 4-month low, focus on ECB

Reuters

* Focus on ECB rate decision on Thursday

* Further slowdown in euro zone inflation seals case for ECB action

* Dlr/yen sets 1-mth high, helped by U.S. yields and firm Nikkei

* Aussie gets brief lift vs U.S. dollar after upbeat Q1 GDP (Adds comments, updates prices)

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, June 4 (Reuters) - The euro eased on Wednesday as expectations intensified that the European Central Bank will unveil a flurry of measures this week to stave off deflation, while the Aussie dollar gained a brief lift from upbeat economic growth data.

The euro gave back some of the gains it made during the previous day's short squeeze, which some traders described as a 'buy-the-rumour-sell-the-fact' move in the wake of subdued euro zone inflation data.

The single currency sagged 0.1 percent to about $1.3611 but held above a recent trough near $1.3586, its lowest level in almost four months.

Figures on Tuesday showed euro zone inflation slowed further in May, all but sealing the case for the European Central Bank to carry out its promise to act when it meets on Thursday.

Sources at the ECB told Reuters last month the bank was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.

A recent Reuters poll showed that the ECB is expected to cut its deposit rate to -0.10 percent in June from the current zero percent while its refinancing rate is likely to be cut to 0.10 percent from 0.25 percent now.

Given prevailing expectations for fresh monetary easing by the ECB this week, some market players see the risk of disappointment and the potential for a bounce in the euro, at least in the short term.

"The danger is the ECB doesn't go as far...as the market has priced in, leading to a nasty short squeeze," said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore.

A key resistance level for the euro is the 200-day move average, Halley said. The euro's rise on Tuesday had stalled near that resistance level, which now lies near $1.3647.

While the ECB is contemplating new measures to shore up growth in the euro zone, the latest data showed the U.S. economy is motoring along after a weather-induced slowdown early in the year.

Figures on Tuesday showed new orders for U.S.-made factory goods rose for a third straight month in April and automakers reported robust vehicle sales in May, boosting the second-quarter outlook.

Benchmark U.S. yields rose to three-week highs, extending a reversal from 11-month lows plumbed last week. That in turn helped the dollar reach a one-month high against the yen at one point on Wednesday.

The dollar last fetched 102.74 yen, up 0.2 percent on the day. It rose to as high as 102.80 yen earlier on Wednesday.

A rise to levels above its early May peak around 103.03 yen would take the dollar to its highest level since early April.

The U.S. 10-year Treasury yield last stood at 2.591 percent , holding near Tuesday's three-week high of 2.600 percent.

Market players said this week's rally in Japan's Nikkei share average was also weighing on the yen.

The Nikkei has risen above 15,000 points this week, having bounced back from a recent low just under 14,000 set back in May.

Gains in Tokyo equities can be seen as being negative for the yen, since sustained rises in shares can bolster Japanese investors' risk tolerance and whet their appetite for overseas assets over the medium term.

The Australian dollar initially rose after data showed the Australian economy grew at a faster pace than expected in the first quarter.

The Aussie dollar was last steady on the day at $0.9266 , after having risen to as high as $0.9299.

"I don't get the sense that the Australian dollar will head lower," said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore, adding that the Aussie dollar also seemed to be benefiting from the euro's recent weakness.

(Editing by Shri Navaratnam & Kim Coghill)

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