Euro stands tall after ECB signals end to rate cuts

By Shinichi Saoshiro

TOKYO (Reuters) - The euro on Friday hovered near the three-week high it hit overnight after the European Central Bank roiled markets by suggesting that it was done cutting interest rates for now.

The ECB on Thursday rolled out a series of bold easing measures, including an expansion in asset buying and a deeper cut to already negative deposit rates.

The euro rallied hard, however, after ECB President Mario Draghi undid the very stimulus he hoped to achieve by signalling there would be no further rate cuts.

The common currency was near the three-week peak of $1.1218 scaled overnight, when it jumped 1.6 percent against the greenback. German two-year bund yields posted their biggest daily rise in three months overnight, helping shore up the euro.

The dollar index suffered big losses on the euro's broad strength, struggling near a one-month low of 95.939.

Following mixed messages from the ECB, focus shifted to the March 14-15 Bank of Japan policy meeting. The BOJ is widely expected to stand pat on monetary policy after adopting negative rates in January, but some speculate the central bank could lower rates further.

"I don't think the BOJ will ease next week. That said, the ECB's easing was a full spectrum one, and the market will approach the BOJ meeting thinking anything could be possible," said Koji Fukaya, president of FPG Securities in Tokyo.

"As for the ECB's easing, it is after all a 'risk on' factor. Its effects could be felt gradually and curb yen strength."

The dollar was up 0.3 percent at 113.52 yen , paring losses suffered earlier when it dipped to 112.75. The greenback slid to a 16-month low below 111 yen last month amid a global bout of risk aversion.

The euro advanced to a three-week high of 126.83 yen .

Providing a rough gauge of post-ECB risk sentiment, Tokyo's Nikkei <.N225> was last up 0.7 percent after dropping as much as 1.6 percent early on Friday.

The equity as well as commodity markets, which saw U.S. crude oil rise to a three-month peak Friday, were expected to continue providing currencies with leads in the coming sessions.

"The ECB's latest stance comes at a time when commodities and oil appeared ready for a corrective fall after their late gains," said Junichi Ishikawa, FX analyst at IG Securities in Tokyo.

"Risk aversion could be next week's theme, potentially pushing dollar/yen back towards 111.00 yen."

The Australian dollar gained 0.5 percent to $0.7489 after slipping 0.4 percent on Thursday. The Aussie hit an eight-month high of $0.7528 on Wednesday thanks to a rally in the price of iron ore, Australia's key export, and it was poised to gain 0.7 percent on the week.

The New Zealand dollar, which took a beating after the Reserve Bank of New Zealand unexpectedly cut interest rates on Thursday, managed to crawl off a one-week low of $0.6618 and last traded at $0.6692.

(Editing by Shri Navaratnam and Richard Borsuk)