GLOBAL MARKETS-ECB easing bets push euro to 3-month low

Reuters - UK Focus

(Recasts with euro falling to 3-month low, updates prices, adds

comments)

* Euro sinks as weaker than forecast German data boosts ECB

rate cut bets

* Wall Street expected to see steady start

* Little impact of ratings upgrades for Spain and Greece

* Investors wary ahead of Ukraine vote, European result

* Thai coup only mild distraction for Asia shares

By Marc Jones and Jamie McGeever

LONDON, May 23 (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

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.

NEGATIVE FEELINGS

Share (LSE: SHRE.L - news) 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.

The FTSEuroFirst 300 index of leading European shares was

little changed at 1,365 points, Germany's DAX

was up 0.2 percent at 9,743 points while Britain's FTSE 100

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 (NYSE: MSCI - news) 's broadest index of Asia-Pacific

shares outside Japan 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 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.

ELECTIONS

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 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

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