By Marc Jones
LONDON (Reuters) - Investors took to the sidelines ahead of what was expected to be an encouraging U.S. employment report on Friday, while the euro nursed losses after the European Central Bank opened the door to more aggressive easing if needed.
The March U.S. non-farm payrolls report will serve as a test of the argument that the economic weakness of January and February was due to bad weather and the recovery of the world's biggest market is still on track.
Median forecasts are for a rise of 200,000 in payrolls, though dealers said the market was now edging more towards something nearer 220,000, which would reassure the optimists and tend to underpin the dollar and stocks.
"We're pretty upbeat about the payrolls," Fahran Ahmad, a trader at Tradenext, said.
Early futures prices pointed to a cautiously positive start for Wall Street, although pricing was little more than speculation with the jobs data due out at 8.30 a.m. ET, an hour before New York trading resumes.
World shares <.MIWD00000PUS>, after wobbling in February and March, have returned to six-year highs this week and were heading for their third consecutive week of gains.
European shares (.FTEU3) were in a pre-jobs data holding pattern as midday approached, but a slender 0.1 percent gain put them on course for their ninth positive session.
Most attention, however, remained on the euro and southern European bonds after Thursday's declaration from the ECB that it was now seriously considering the kind of aggressive asset buying employed by the United States, Japan and Britain.
The euro sagged to a fresh five-week low of $1.3694 as it headed for a third week of net losses against the dollar, while the government bonds of Greece, Spain, Italy, Ireland and Portugal all made ground.
The wait for the U.S. jobs figures limited moves elsewhere. The dollar index (.DXY) steadied after hitting its highest level since February 27 while U.S. government bond yields were at a standstill at 2.7935 percent.
The dollar also pared gains on the yen to 103.85, having topped 104 for the first time since January.
"Some voices are talking about targets of 108, 110 yen for the dollar again," said Masashi Murata, senior currency strategist at Brown Brothers Harriman.
In subdued Asian trading, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> had barely budged, while Japan's Nikkei (.N225) eased a fraction, with a softer yen providing some support.
A much stronger than-expected payrolls report might not be so positive for U.S. shares as it could reignite speculation of an earlier rate hike from the Federal Reserve.
Likewise, a weak number was likely to hurt the dollar and boost Treasuries, but the impact on equities might be tempered by expectations monetary policy would stay looser for longer.
U.S. data so far this week has been too mixed to draw any firm conclusions on the outlook for policy.
Manufacturing and car sales figures have been generally encouraging, but an unexpected widening of the U.S. trade deficit on Thursday implied net exports were a much bigger drag on the economy last quarter than first thought.
Indeed, RBS halved its first-quarter growth forecast for the United States to an annualized 0.6 percent.
NOT NOW, BUT MAYBE SOMETIME
In Europe, focus remained on what looks to be an increasing divergence between the ECB's policy outlook and those of the Federal Reserve and Bank of England.
Crucially, ECB head Mario Draghi declared on Thursday the bank's members were "unanimous" on using unconventional easing if needed. That marked a major change as some countries, notably Germany, have long opposed steps such as quantitative easing.
European bond yields fell as a result and even Greek 30-year bond yields slipped below 6 percent for the first time since the global financial crisis.
The relentless rally in Greek bonds seen over the past two years could be given a further leg up later on Friday, with ratings agency Moody's widely expected to lift at least the rating outlook of the euro zone's weakest member.
"There is talk among investors that the country could return to market as early as next week if Moody's do upgrade it," said a trader at a market maker in Greek government bonds, referring to Athens' plans to issue a 2 billion euro five-year bond soon.
In commodities markets, one of the few movers was aluminum, which was on track for its biggest weekly gain in 16 months as a series of capacity cutbacks by top producers underpinned the market.
Spot gold floated up to $1,292 an ounce, but was still uncomfortably close to the two-month trough of $1,277 touched early this week. It was also facing a third straight week of losses for the first time in more than six months.
Oil was also under pressure as the prospect of Libya's main ports reopening left it facing its biggest weekly fall in three months. Brent steadied at $106.50 a barrel after a bounce of 1.4 percent on Thursday, while U.S. crude added 70 cents to $101.02 a barrel.
(Additional reporting by John Geddie and Francesco Canepa in London; Editing by Louise Ireland and Susan Fenton)