European share markets traded fractionally higher after the open, and investors began looking ahead to US jobs data on Friday which could indicate the next direction of all-important US interest rates.

The euro dropped below $1.0850 following data confirming a contraction in fourth quarter German gross domestic product (GDP).

The euro has fallen by nearly 10 per cent against the dollar since the record high of $1.1906 it reached on its first official trading day, January 4.

The European Central Bank began a policy-setting meeting in Frankfurt earlier on Thursday, with an announcement expected during the European evening. Economists polled by Reuters expect no change in interest rates from their current 3.0 per cent.

But the market still favours the dollar, as recent strong US economic indicators have fuelled speculation that the US Federal Reserve may raise interest rates from the current 4.75 per cent at its next policy-setting meeting at the end of March.

The dollar reached three-month highs against the yen in Europe's early morning session and dealers saw nothing to stop its rise.

With the yen saddled by negligible Japanese interest rates and the dollar boosted by the strong US economy, the Japanese currency traded at 122.84 to the dollar in Europe, its lowest level since December 1.