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Tuesday February 5, 2008 - 10:49:55 GMT
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FOREX NEWS-Euro slides as PMI data ups ECB rate cut pressure

Tue Feb 5, 2008 5:43am EST

(Recasts, adds comment and quote)

By Jamie McGeever

London, Feb 5 (Reuters) - The euro fell sharply on Tuesday as surprisingly weak euro zone service sector data increased pressure on the European Central Bank to cut interest rates to shore up growth.

The euro fell 1 percent on the day against the dollar after figures showed that the service sector growth across the 15-nation bloc slowed in January to its slowest rate in four and a half years.

Some countries such as Germany, Spain and Italy registered contraction. (See [ID:nL05318197])

The ECB meets to set interest rates on Thursday, and is widely expected to keep them on hold at 4 percent. But investors and analysts believe the services sector data can only force the bank to soften its tough stand on inflation, sharpen its focus on growth and bring forward the timing of its first rate cut.

"The ECB bottom line is that, irrespective of rhetoric that has already started to look a bit artificial, a move toward a more cautious stance seems around the corner," strategists at Unicredit said in a note.

"A shift to neutral should be in the cards for the spring ... (and) such numbers vindicate our view that official rates will start cruising toward 3 percent (bound to be hit in mid-2009) sooner than many officials are indicating." At 1015 GMT the euro was down 1 percent at $1.4675 <EUR=>, well on track for its steepest one-day fall in two weeks.

The euro's weakness against the dollar helped lift the greenback across the board. The dollar index, a measure of the greenback's value against a basket of six currencies, was up 0.9 percent at 76.00 .DXY, moving further away from the two-month lows struck last week.


The dollar was up 0.9 percent on the day against the yen at 107.70 yen <JPY=>, on track for its biggest one-day rise in over six weeks and moving further away from a three-year low of 104.95 yen struck in January.

The euro's slide pulled major currencies out of the narrow ranges they were stuck in overnight and added to the dollar's resiliency.

The Federal Reserve's aggressive rate cuts in recent months are lending the dollar support as investors take the view the bold action will support the U.S. economy -- perhaps keeping it from recession -- and fuel a recovery later in the year.

This contrasts starkly with the ECB's stance so far.

"The Fed's action is allowing the optimists to paint a better picture, certainly for the second half of the year. Given the fact they've acted and given that the U.S. futures strip has discounted additional easing, it's fair to say there's a lot of bad news priced into the dollar already," said Derek Halpenny, senior currency economist at BTM-UFJ in London.

The Fed has already slashed rates by 225 basis points and is seen cutting at least another 75 by the end of the year. Futures markets expect the ECB to cut rates by 50 basis points by the third quarter and are split on a further quarter point easing before the end of the year.

The Bank of England also meets to set rates on Thursday, and is expected to cut borrowing costs a quarter of a point to 5.25 percent. This would be its second rate cut in three months. The Reserve Bank of Australia, meanwhile, headed down the opposite path on Tuesday, hiking rates to an 11-year high of 7 percent and suggested more tightening may be needed.

The Aussie dollar initially pared losses but succumbed to the U.S. dollar's broad strength in the London session, last trading down 0.4 percent at $0.9050 <AUD=>. (Reporting by Jamie McGeever; editing by David Christian-Edwards)

© Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.


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