FOREX-Euro on tenterhooks over ECB; Aussie jumps

Reuters

* European analysts deeply divided on chances of ECB rate cut or other easing

* Aussie spikes after data supports steady rates outlook

By Patrick Graham

LONDON, March 6 (Reuters) - The euro traded flat on Thursday with players split down the middle on the chances of the European Central Bank taking more steps to support euro zone growth and weaken base returns on the single currency versus its peers.

With inflation stuck below 1 percent, the bank has a number of options. Some believe it will announce a 10 basis point cut in its main interest rates at 1245 GMT while 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.

An ECB source told Reuters at the start of this week that there would be unanimous agreement to end so-called sterilisation of the bond purchases the bank has made as part of efforts to ease the euro zone's debt crisis.

Any action on Thursday would be likely to weaken the euro. With many terming the market as split 50-50 on the chances of that happening, a decision to do nothing can also be expected to send the currency the other way.

"Opinions are split so that the FX market reaction is likely to be pronounced today regardless of which way the ECB decision is going to go," analysts from Germany's Commerzbank said in a morning note.

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 cut in already record low base rates reduces those returns 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 a further 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.

"If the bank does nothing we will probably see a blip higher in the euro against the dollar. If it cuts we may see some sharper action on the downside."

The euro last stood almost unchanged at $1.3728.

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 0.5 percent to $0.9028 just off a one-week high of $0.9033.

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 dollar rose to 102.74 yen in early European trade and the euro to 141.04, both up almost half a percent.

The U.S. dollar index climbed to its highest for the week at 80.272. It has since retreated to 80.155, partly due to disappointing U.S. data on Wednesday.

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