LONDON (Reuters) - The euro rose off a seven-week low on Wednesday as talk of the U.S. Federal Reserve extending the lifespan of its stimulus program and some robust data offset expectations of more European Central Bank easing in coming months.
With uncertainty high over what steps the ECB might hint at after its meeting on Thursday, investors focused on fresh euro zone data as solid services PMIs and a surge in German factory orders offset some weaker retail figures.
The services report pointed to a continued gradual recovery in the 17-country euro zone but one that remains painfully slow in many parts of the bloc.
European shares had already inched to a new five-year high by the time the data came out. A batch of better-than-expected results provided the leg up, including from world No. 1 jobs agency Adecco ADEN.VX, which flagged increasing demand in Europe. .EU
The euro held onto gains at $1.3520, having jumped after the German data and risen steadily from $1.3469 overnight, although expectations of a dovish turn by the ECB kept a lid on the shared currency.
"For the next couple of days we have such a heavy events schedule, with the ECB tomorrow and then U.S. payrolls on Friday, that I think we are looking at the market battening down the hatches," said Ned Rumpeltin, head of G10 FX strategy at Standard Chartered.
The dollar, meanwhile, pared its recent gains against a basket of major currencies and dipped 0.3 percent .DXY, even while it edged up on the Japanese yen to 98.60.
Comments from Fed policymaker John Williams, who said the central bank should wait for stronger evidence of growth momentum before trimming bond-buying, helped balance out a surprisingly strong U.S. service sector report.
A pair of research papers by top Fed officials suggesting the central bank has the scope for even more economic stimulus and for more relaxed thresholds on when to raise rates also created a stir.
Jan Hatzius, chief economist at Goldman Sachs, felt the papers were important enough to alter his outlook for policy.
"The studies suggest that some of the most senior Fed staffers see strong arguments for a significantly greater amount of monetary stimulus," he wrote in a note to clients.
"Our central case is now that the FOMC will reduce the threshold from 6.5 percent to 6 percent at the March Open Market Committee meeting."
That helped Treasury prices and trimmed yields on 10-year notes by 15 basis points to 2.6476 percent, while German Bunds matched the moves in Europe. <GVD/EUR>
Futures prices also pointed to Wall Street making back the small losses Tuesday's stronger-than-expected data had caused as investors began thinking again about the Fed trimming its huge stimulus program.
Asian markets had for the most part moved sideways in face of the uncertainty over U.S. and European monetary policy, though Japanese stocks .N225 managed to buck the trend thanks to gains in major car makers.
Excitement was otherwise sorely lacking, with MSCI's index of Asia-Pacific shares outside Japan .MIAPJ0000PUS barely moved. Australia's main index was all but flat , while shares in Shanghai .SSEC dipped.
While evidence of economic resilience from Tuesday's upbeat services data was welcome, it also adds to the case for the Fed to wind back its bond buying program. Most analysts still favor March as the window for a move, but a shift in December is a growing risk.
New Zealand also added to the run of better global economic news as employment jumped well more than forecasts. It prompted investors to bring forward rate hike expectations. The country's dollar climbed a third of a U.S. cent to $0.8400.
In commodity markets, gold was a few dollars firmer at $1,317.79 and trying to stabilize after seven straight sessions of losses. Copper rose 0.4 percent. <GOL/>
Oil prices recouped just a little of their recent losses, which had seen U.S. crude end at a five-month trough on Tuesday. Growing U.S. supplies have continued to pressure oil prices, with U.S. crude ending on Tuesday at a five-month low <O/R>.
Brent crude regained 80 cents to $106.16 a barrel, while NYMEX crude futures bounced 82 cents to $94.18.
Reporting by Marc Jones; Editing by Gareth Jones and Hugh Lawson