TOKYO: A rally in Asian shares fizzled out on Thursday as markets marked time before the European Central Bank's policy decision later in the day, with the euro staying pressured by widespread expectations of a rate cut to support fragile euro zone growth.
Safe-haven U.S. dollar outperformed with its index measured against key currencies gaining 0.5 percent.
"Until markets see how the ECB intends to respond to the debt problem through means other than interest rate cuts, it would be difficult to take positions on the euro," said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5 percent after hitting a seven-week high on Wednesday. U.S. markets were closed on Wednesday for the Independence Day holiday.
Japan's Nikkei average eased 0.1 percent, after closing at a two-month high on Wednesday.
A Reuters poll of economists showed a majority expect the ECB to cut its main interest rate by 25 basis points to 0.75 percent on Thursday, while money market traders are evenly split on whether the central bank will cut the deposit rate, a separate survey showed.
There is also speculation the ECB could restart its purchases of troubled euro zone bonds under its securities markets programme (SMP) to push down euro zone borrowing costs or take another round of long-term refinancing operation (LTRO) to inject additional funds into the financial system.
"The focus for today's ECB meeting is whether it will take steps other than cutting interest rates, namely restarting SMP or LTRO," added Brown Brothers Harriman's Murata.
The euro steadied around $1.2525, stuck in a recent $1.24-$1.27 range against the U.S. dollar.
Against riskier currencies, the euro held near record lows, standing at A$1.2214 against the Aussie, close to its all-time trough of A$1.2124 hit in early February, and at NZ$1.5609 against the kiwi, just above its lifetime low of NZ$1.5541 hit on Wednesday.
"We suggest that selling the EUR and buying a relatively 'high beta' currency, such as the AUD, would perform well in light of a more aggressive ECB response to the problems" in Europe, Barclays Capital analysts said in research note.
Also on Thursday, the Bank of England is expected to launch a third round of monetary stimulus at its policy meeting.
Surveys on Wednesday suggested all of Europe's biggest economies were in recession or heading there and there was little sign things will improve soon, backing views for easing by Europe's major central banks this week.
U.S. DATA NEXT
After Europe's central bank decisions, markets will turn to Friday's key monthly U.S. jobs report for clues over whether the Federal Reserve will take additional easing steps. Non-farm payrolls were expected to see an addition of 90,000 workers in June, with the unemployment rate holding steady at 8.2 percent.
"ECB and BoE decisions are pretty much priced in, so markets will likely extend their wait-and-see stance until the jobs data," said Hiroyuki Kikukawa, general manager at trading company Nihon Unicom Inc in Tokyo.
"Unless the jobs data clearly points to the need for another round of quantitative easing by the Federal Reserve or financial markets are again gripped with panic, shares are expected to generate small gains and commodities markets are highly likely to stabilise at current levels," he said.
U.S. crude futures extended losses, falling 0.8 percent at $87 a barrel, while Brent inched up 0.1 percent at $99.90 but stayed below $100.
Copper was steady around $7,722.75 a tonne and gold was resilient despite the dollar's strength, ekeing out a 0.1 percent gain at $1,617.05 an ounce.
"Price moves on base metals such as copper will be primarily driven by the size of an interest rate cut by the ECB and the magnitude of expected stimulus from the BoE," ANZ Bank said in a research note.
With investors growing cautious about taking risk, Asian credit markets weakened, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 2 basis points.
While leading economies in the West and Asia took a beating from the euro zone's protracted debt crisis, consumer confidence and imports were robust in Southeast Asia, highlighting the region's resilience to the global economic downdraft as strong domestic demand helps offset weaker exports. - Reuters
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