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Euro hostage to ECB ability to surprise, China a distraction

By Wayne Cole

SYDNEY (Reuters) - Asian share markets grudgingly gave ground on Thursday while the euro flatlined at $1.3600, hostage to great expectations that the European Central Bank will finally end months of dithering by easing policy further.

Dealers were only briefly distracted by HSBC/Markit's measure of the China service sector which dipped to 50.7 in May from April's 51.4, though that was still above the 50-point level that is supposed to separate growth from contraction.

There was better news from Germany which reported industrial orders rebounded by 3.1 percent in April, well above expectations.

Japan's Nikkei .N225 shed early gains to end 0.08 percent higher at 15,079, failing to extend a two-week rally to test the April top of 15,164.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dipped 0.05 percent, while South Korea's market lost 0.65 percent.

Financial spreadbetters expected flat starts for Britain's FTSE 100 .FTSE, Germany's DAX .GDAXI and France's CAC 40 .FCHI.

Wall Street had been just as hesitant with the Dow .DJI ending up 0.09 percent, while the S&P 500 .SPX gained 0.19 percent and the Nasdaq .IXIC 0.41 percent.

The economic outlook was no clearer after a mixed bag of U.S. data that included disappointing results on the trade deficit and private employment, but better news on the service sector. TOP/CEN

Still, it was notable that JPMorgan's measure of global industry output boasted a strong rise of 1.5 points in May, hinting at a broadening and strengthening in world growth.

HANGING ON THE ECB

In currency markets, the euro held a tight orbit around $1.3600 EUR= awaiting the outcome of the ECB policy meeting at 1145 GMT and President Mario Draghi's news conference at 1230 GMT.

Economists in a Reuters poll expected the ECB to cut its main refinancing rate by 15 basis points to 0.10 percent and the deposit rate to -0.10 percent from zero.

Imposing a negative deposit effectively charges banks for parking their excess money at the central bank -- a step that may, or may not, encourage them to lend the money instead.

The ECB is also thought likely to launch a refinancing operation aimed at funding smaller business across the EU, but to stop far short of the sort of quantitative easing embraced by the U.S., UK and Japan.

However, with so much already priced in to markets it could be difficult for policymakers to proffer a positive surprise.

"We continue to think that risks going into ECB are biased to the central bank underwhelming the market and are tactically positioned for a bounce in EUR/USD," cautioned JPMorgan strategist Niall O'Connor.

"The ECB's tone and message will be just as if not more important than the alphabet soup of policy announced -- does this represent a step change or a sea change for the ECB?" he added.

"We believe attitudes will change only gradually but we'll have to wait and see."

Yet, expectations of ECB action have helped drive German bond yields lower, giving the dollar a larger rate advantage. Indeed, U.S. two-year Treasuries US2TY=RR are now offering a premium of 34 basis points over their German counterparts DE2TY=RR, the fattest margin in almost seven years.

A break below the recent trough at $1.3585 could see the euro gap to support in the $1.3475/$1.3500 area. The U.S. dollar index .DXY was steady at 80.634, while the currency kept most of its recent gains on the yen at 102.55 JPY=.

Benchmark 10-year Treasury yields edged down to 2.592 percent US10YT=RR having touched levels not seen since mid-May the previous day.

In commodity markets, copper was subdued after suffering its biggest one-day fall since mid-April amid jitters about the impact on financing deals from a probe at a Chinese port. (Full Story)

Benchmark copper CMCU3 was changing hands at $6,784.50 a tonne, having shed 1.2 percent on Wednesday.

Gold was idling at $1,244.50 an ounce XAU=, still pinned near a recent four-month trough of $1,240.61.

Brent crude LCOc1 for July delivery eased 10 cents to $108.30 a barrel, while U.S. crude CLc1 dipped 23 cents to $102.41 per barrel.

(Editing by Shri Navaratnam & Kim Coghill)

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