Athens pledge, cautious Fed soothes Europe's investors

LONDON (Reuters) - The euro nudged towards its best week in 18 months while yields on low-rated bonds fell as investors welcomed the Fed's cautious approach to raising interest rates and a reform pledge from Athens that could avert a cash crunch.

Illustrating the problems low inflation is causing for central banks looking to normalize monetary policy in the likes of the United States and Britain, oil was set to rack up its third weekly price slump. [O/R]

Stocks flat-lined, but euro zone bond yields dipped after assurances from Athens that it will submit reforms needed to unlock bailout cash. Focus also drifted back to the European Central Bank's trillion euro asset purchase scheme.

"The outlook for European markets is better than it has been for years, and the risks now are largely political," said Christian Schultz, senior economist at Berenberg.

Greek bond yields opened 18 basis points lower at 12.10 percent, while Portuguese, Spanish and Italian equivalents were all down around 1-2 bps. German bonds - the euro zone benchmark - were flat at 0.19 percent, just above a record low.

The euro was 0.2 percent higher against the dollar at $1.0683 , well below Wednesday's high above $1.10 but still leaving the single currency on track for its best weekly performance in 18 months.

"What's been dominating the euro over the course of the last week has been the moves in the dollar. The FOMC announcement was, on margin, more dovish than expected," said Phyllis Papadavid, senior global FX strategist at BNP Paribas in London.

The pan-European FTSEurofirst 300 share index was flat at 1.597.27 points, having hit a new 7-1/2 year high just after markets opened.

The impetus from Wednesday's dovish statement from the U.S. Federal Reserve started to ease, but Europe was bolstered by gains in the construction sector after Holcim and Lafarge agreed to new merger terms.

Asian stocks were also broadly unchanged MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> up 0.01 percent after rallying 1.3 percent the previous day. It was on course for a gain of over 2 percent for the week.

The region's decliners included shares in Hong Kong, Malaysia, South Korea and Thailand. Australian and Chinese stocks were among the gainers in a choppy session.

Japan's Nikkei <.N225> swerved in and out of the red and was last up 0.4 percent, taking a breather after a strong rally since February that took it to a 15-year high.

"There are some signs the rally had got overheated. So the market is in a correction phase," said Masahiro Ayukai, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

The dollar was little changed against the Japanese yen at 120.725 yen after sinking to the week's low of 119.29 after the Fed's statement.

The dollar index was down 0.3 percent at 98.96 <.DXY> but still well above a low of 96.628 plumbed midweek. The index was on track for slight loss on the week after touching a 12-year high above 100.00 on March 13.

In commodities, Brent crude oil was down 0.7 percent at $54.04 a barrel hurt by oversupply worries after Kuwait said OPEC had no choice but to maintain output levels.

U.S. crude was down around 1 percent, a shade above the six-year low of $42.03 a barrel hit earlier in the week.

(Editing by Toby Chopra)