European shares gain on outlook for central bank action

By Richard Hubbard

LONDON (Reuters) - European shares edged higher and the euro hovered near three-month lows against the dollar on Thursday on expectations the European Central Bank could point to future policy easing after its rate-setting meeting later.

The British pound was also weaker against the dollar, touching a fresh 2-1/2-year low of $1.4965, with markets expecting the Bank of England to announce more monetary stimulus when its policy meeting ends at 1200 GMT.

Looser policy prospects from two major world central banks, along with signs Japan is about to step up aggressive monetary easing, is contrasting with changes in the outlook for the U.S. Federal Reserve, as signs of economic recovery grow.

"The reality is that the Fed is still pumping in $85 billion a month at the moment, whereas the ECB and the BoE aren't," said Daragh Maher, currency strategist at HSBC.

"But the data has forced the idea that the U.S. economy is improving and therefore, going forward, the direction of policy could change."

The dollar is close to its highest level in 6-1/2 months against a basket of major currencies as jobs data this week has pointed to a recovery in the labour market, a key condition for the Fed to wind up its massive stimulus programme.

With market players focused on the strength of the U.S. economy, the dollar was seen drawing further support from signs Congress is about to pass a measure to keep funding government spending until the end of September.

Meanwhile, the expected support from the ECB helped lift the pan-European FTSEurofirst 300 share index 0.1 percent to 1,187.61 points in early trade, near the 4-1/2 year intraday high of 1,193.35 points hit on Wednesday.

Frankfurt's DAX, London's FTSE 100 and Paris's CAC-40 were between 0.2 and 0.4 percent higher.

The euro was slightly firmer in early European business at around $1.3010, after sliding to $1.2994 earlier, within sight of its December trough of $1.2876.

In the bond market attention was on a Spanish debt auction for up to 5 billion euros of new debt, which was expected to find decent demand despite worries among investors about the impact of the political deadlock in Italy.

German Bund futures were little changed on the day at 145.14, but the contract could gain if ECB President Mario Draghi turns out to be more downbeat on the euro zone's prospects than expected.

(Reporting by Richard Hubbard; Editing by Will Waterman)