FOREX-Euro firm after ECB decision, but vulnerable to Draghi
* Euro rises as Spain hits top end of target at bond sale
* Stays vulnerable to hints of policy easing by ECB
* ECB seen holding rates when decision announced at 1245 GMT
* Dollar index hovers just below 6-1/2 month high
LONDON, March 7 (Reuters) - The euro rose on Thursday, helped by healthy demand at a Spanish debt auction which eased some investor concens about the euro zone, but it was vulnerable to losses if the European Central Bank flagged interest rate cuts. The currency showed no clear reaction after the ECB, as expected, kept its benchmark rate unchanged at 0.75 percent, with investors focused on a press conference with central bank president Mario Draghi that starts at 1330 GMT. The ECB is expected to lower its inflation and growth forecasts, giving Draghi room cut rates and support the recession-hit economy in coming months. The euro was up 0.4 percent on the day at $1.3025. It had risen to a session high of $1.3045 after Spain sold 5 billion euros of bonds, hitting the top end of its targeted amount at reduced borrowing costs despite political uncertainty in Italy. But the currency looked susceptible to losses and could retest last week's near three-month low of $1.2966, below which it could fall to December's low of $1.2876. Resistance was cited at $1.3126, the euro's 100-day moving average. Traders said any gains towards $1.3100 would draw more sellers given investors are snapping up the dollar on the back of good U.S. economic data and bets the Federal Reserve may halt its asset purchase programme towards the end of the year. "We will be getting new forecasts from the ECB and if there is a downgrade to inflation and growth forecasts, it could set the stage for a rate cut in the second quarter," said Ned Rumpeltin, head of G10 currency strategy at Standard Chartered. "We are bearish on the euro on a fundamental basis and if Draghi sounds dovish, we could see it dropping towards $1.2875. A more neutral stance may see a rebound but this should remain a short-lived technical rebound." Morgan Stanley strategists said they expect the euro to decline towards the $1.2880/50 area initially and then towards their $1.2660 target, given downside risks that the euro zone economy faces. Most analysts say even if borrowing costs for highly indebted euro zone countries like Spain and Italy do not rise, on a more fundamental basis the struggling economy will need a more accommodative monetary policy stance along with a weaker currency to boost growth. "The Spanish auction shows there is still demand (for its debt) which is positive and a little bit surprising considering what is happening in Italy," said Richard Falkenhall, currency strategist at SEB.
STERLING JUMPS The euro pared gains against sterling, which rebounded from near 2-1/2 year lows against the dollar to $1.5075 after the Bank of England decided not to resume its quantitative easing programme. Many investors had built bets against the pound in recent weeks on expectations that a grim UK economic outlook will prompt the BoE to pump in more liquidity. The BoE's bank rate is at a record low of 0.5 percent. The euro's and sterling's rise against the dollar saw the dollar index slip from 6-1/2 month highs. The index, which measures the dollar's performance against a basket of currencies, was last down 0.1 percent at 82.391, having risen to 82.604, its highest since Aug. 20, in late Wednesday trade. It has rallied more than 4 percent from this year's trough of 78.918 plumbed on Feb. 1. Against the yen, the dollar was up 0.3 percent at 94.38 , moving closer to a 33-month peak of 94.77 reached on Feb. 25. Earlier on Thursday, the Bank of Japan kept monetary policy unchanged, but the yen weakened against the dollar on expectations of aggressive easing in the future. Some strategists have revised their forecasts to show sustained yen weakness. UBS changed its end-2013 forecast for the dollar to 100 yen from 85 yen.