By Marc Jones and Jamie McGeever
LONDON (Reuters) - The euro fell to a three-month low against the dollar and stocks and bonds in the region climbed on Friday, after a wobble in German business confidence added to expectations the European Central Bank will cut interest rates next month.
Asian shares had also finished the week strongly, hitting one-year highs, while benchmark U.S. and European bond yields, which move inverse to prices, were heading for rises after a week lacking in clear direction in terms of data and sentiment.
Mario Draghi and his ECB colleagues have been sending clear signals in recent weeks that a rate cut plus a few other unconventional measures are on the cards for next month.
A weaker-than-expected reading from Germany's closely-watched Ifo business climate index as it fell to its lowest level of the year was enough to convince many ECB action was now a nailed-on certainty.
The euro was down a third of 1 percent on the day at $1.3621, the lowest in three months and crucially below a technical support level of $1.3636 that had held firm for almost nine months.
It's a level the single currency has flirted with three times this week but has not closed below it. This could be the first day it has done so since September last year.
"The renewed fall in the Ifo in May suggests that the German recovery may be slowing. We expect annual GDP growth of about 2 percent this year and next, which will not be strong enough to drive a rapid recovery across the euro zone or to eradicate the threat of deflation," said Jennifer McKeown, senior European economist at Capital Economics.
Sovereign credit ratings upgrades on Friday for Spain and Greece had little impact on European markets as their respective economies have been improving for some time [ID:nL3N0O91AQ] [ID:nL6N0O9199]
Investors were also reluctant to take on too much risk ahead of European election results and a presidential election in Ukraine this weekend, and because British and U.S. markets are closed on Monday, which will dry up market liquidity.
"In places like Italy and Greece we don't have properly elected governments, they are just cobbled together, so this weekend's results will play on people's minds," said Marc Ostwald, a strategist at Monument Securities.
Share markets in Europe suffered a soft start but the ECB expectations had helped them recover by midday and U.S. futures pointed to Wall Street starting steady. (.N)
The FTSEuroFirst 300 index of leading European shares was little changed at 1,365 points (.FTEU3), Germany's DAX (.GDAXI) was up 0.2 percent at 9,743 points while Britain's FTSE 100 (.FTSE) was down 0.2 percent at 6,801 points.
Estonia's ECB member Ardo Hansson on Friday echoed Germany's Jens Weidmann in backing the idea of charging banks a penalty if they stockpile spare cash at the ECB, a move designed to encourage them to use it instead to lend to firms and consumers.
"Negative interest rates (on ECB deposit facility) are not completely uncharted territory as some of the smaller countries have done this. The fact that it has been tried elsewhere makes you a bit more comfortable," Hansson said in an interview.
Earlier in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was up 0.1 percent at 487.70 after hitting a one-year high of 488.42.
Markets were only mildly distracted by news that Thailand's military had seized power in a bloodless coup late on Thursday, pitching the nation into a further period of uncertainty as the long drawn out political crisis shows no signs of resolution.
The Nikkei (.N225) climbed 0.9 percent as the yen remained on the back foot against the dollar. The Japanese index gained about 2.7 percent this week, notching its first weekly gain in three.
Investors also felt a sense of relief getting through the week without serious market ructions from the crisis in Ukraine as it, like Europe, also gears up for elections over the weekend.
Russian shares (.MCX) were sitting just off a 3-month high after a fourth week of gains. U.S. Treasury debt yields slipped 1 basis point on the day to 2.54 percent but were still up almost 5 basis points on the week following the recent slide to multi-month lows below 2.50 percent.
Against the backdrop of this weekend's European elections where Eurosceptic parties are expected to make gains, Italian 10-year yields were on track for their biggest weekly rise in a year, albeit from recent multi-year lows.
The dollar traded a shade higher at 101.93 yen, and has gained about 0.2 percent on the week. Though the rise is modest, it is still poised to snap a four-week losing run versus the yen.
Benchmark three-month nickel futures at the London Metal Exchange (LME) looked set to pocket a 3.5 percent weekly gain, building on the year's stellar advance after a shutdown of Indonesian supply, while Brent oil and gold were steady after largely quiet weeks.
(Reporting by Jamie McGeever, additional reporting by John Geddie in London; Editing by Alison Williams; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting;
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