By Marc Jones
LONDON (Reuters) - European shares and oil prices dipped on Friday at the end of what looked set to be their best week since November, while the dollar eased on caution ahead of first quarter growth data from the world's biggest economy.
A growing belief the European Central Bank will react to the recent deterioration in euro zone's economy by cutting interest rates next Thursday has seen European stocks jump this week, pushed the euro to a three-week low and helped drive down bond yields.
A gloomy new set of surveys from the bank further supported those rate cut calls as they underscored the slowdown in lending and the difficulties firms in the bloc are facing to get credit.
Portugal said on Thursday that it had signed a deal with the European Investment Bank to effectively underwrite some of the risk banks take when they extend loans, but financial markets are hoping for more support from the ECB beyond just a rate cut.
With investors looking to take a breather after five days of gains, the weak data fuelled a bout of profit taking across risk assets by mid-morning.
Europe's top shares on the FTSEurofirst 300 were down 0.6 percent as London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX dropped 0.5, 1.1 and 0.6 percent respectively.
Growth-attuned oil and copper were both facing their biggest falls of the week while German government bonds, favoured by risk-sensitive investors, climbed as investors opted for safety.
But for the week overall, most were comfortably higher. The FTSEurofirst was just about on track for its best week since November, as too was oil. Gold, which last week saw its biggest daily fall on record, was heading for its best week since Jan 2012.
"We have ended the week on a risk-on footing," said Societe Generale strategist Kit Jukes.
"The bounce by gold is testimony to that, we have squeezed out the sterling bears and we have rate cut hopes. Saying that, the euro zone money supply numbers continued to show a complete lack of lending, but if we get a positive number out of the U.S. later we will still end the week on a positive note."
U.S. gross domestic product, due to be published at 1230 GMT is forecast to have grown at a 3 percent annual rate, but if the number falls short of the mark it could stoke concerns about loss of momentum as the impact of automatic government spending cuts kicks in.
Wall Street was expected to open lower ahead of the data with futures for the S&P 500, the Dow Jones and the Nasdaq 100 falling 0.2 to 0.3 percent.
The University of Michigan closely-watched sentiment survey is also due at 1355 GMT, while investors will have another round of corporate earnings to digest.
BOJ HOLDS STEADY
Asian equity markets had seen a steady end to the week after the Bank of Japan kept its monetary policy steady, a widely expected move after it unveiled aggressive stimulus measures earlier this month.
The dollar, which had been pressured against the yen throughout the Asian session by profit-taking and yen-buying and after better U.S. data overnight, was down 0.15 percent against a basket of currencies as Europe headed toward midday.
The soft lending data from the ECB also reapplied downward pressure to the euro to push it back towards $1.30 although it remained a safe distance from this week's three-week low of $1.2954.
"I'm suitably encouraged that the euro fell yesterday after the first signs of good U.S. data... going into the ECB meeting, a rate cut is probably not fully priced in, and we think it could fall to $1.2845-75 running up to that," said Gavin Friend a strategist at National Australia Bank in London.
European bond markets have seen a general rise in the appetite for riskier euro zone periphery bonds this week as the prospect of an ECB rate cut has firmed and Italy showed the first signs of emerging from its recent political stalemate.
Safe-haven German Bunds edged higher and Italian bonds dipped slightly on Friday though, with investors still wary that talks to form a government in Rome could be derailed by major party differences.
Prime Minister-designate Enrico Letta said early-stage talks to form a government after February's inconclusive election were "encouraging", but noted problems in reaching a deal with the Silvio Berlusconi-led centre-right.
"When ... (Letta) was designated the market was positive about it, believing he will form a government. What we're seeing now is a counter-reaction," said Viola Julien, fixed income analyst at Helaba Landesbank Hessen-Thueringen in Frankfurt.
In the oil market, Brent crude eased back below $103 a barrel after rising $3 in the past two sessions, with investors cautious over the tepid outlook for growth in the world's two largest oil consumers, the United States and China.
"We know what is happening in Europe but we're uncertain about growth prospects in China and the U.S and that's probably also why Brent is underperforming," said ANZ analyst Natalie Rampono.
(Additional reporting by David Brett and Florence Tan in Singapore; editing by Peter Graff and Philippa Fletcher)