Tuesday February 5, 2008 - 23:36:01 GMT
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Reuters - www.reuters.com
FOREX NEWS-Euro drops; ECB rate cuts seen after weak data
(Recasts, updates prices)
NEW YORK, Feb 5 (Reuters) - The euro slid against most
major currencies on Tuesday as dismal euro zone service sector
data fueled expectations the European Central Bank might follow
the United States in cutting interest rates.
The dollar pared early U.S. gains versus the yen after a
report showed a sharp drop in activity in the U.S. service
sector as well in January. The weak data reinforced fears the
economy is slowing even as the Federal Reserve cuts rates
aggressively to revive growth.
The euro fell more than 1 percent against the dollar after
figures showed service sector growth across the 15-nation bloc
slowed in January to its most sluggish in 4-1/2 years. Germany,
Spain and Italy registered contractions. For details, see
A separate report showed euro-zone retail sales defied
expectations of a monthly rise in December and fell,
underscoring a slowing economy.
"They are not insulated from a global slowdown," said Brian
Taylor, head currency trader at M&T Bank in Buffalo, New York.
He added that "the euro may be trading back at 1.45 to the
dollar really soon."
In late morning trading in New York, the euro was down
about 1.3 percent at $1.4636 <EUR=>, on track for its steepest
one-day loss since mid-December.
The euro's weakness against the dollar helped lift the
greenback across the board despite the weak U.S. service sector
data. The dollar index, a measure of the U.S. currency's value
against a basket of six currencies, was up 1.1 percent at
77.436 .DXY, on track for its biggest one-day percentage
advance since mid-December and moving further away from
two-month lows struck last week.
The sharp drop in European data "played straight into the
hands of the euro bears, supporting their argument that the ECB
will not be able to remain hawkish much longer and will have to
follow the Fed by lowering rates relatively soon," said Boris
Schlossberg, chief currency strategist for DailyFX.com.
The ECB meets to set interest rates on Thursday and is
expected to keep them on hold at 4 percent.
Against the yen, the dollar traded 0.2 percent higher at
106.89 yen <JPY=> after earlier climbing as high as 107.74. The
U.S. currency gave up almost all its gains after the dismal
showing in the Institute for Supply Management's
non-manufacturing index. The index plummeted in January to
levels not seen since the 2001 recession. [ID:nN05101922]
"The data is extremely dollar-negative, although the
inability to sustain dollar losses last week will keep the
market skittish and follow-through will be restrained," said
Alan Ruskin, chief international strategist at RBS Greenwich
The Fed's aggressive rate cuts in recent months lent some
dollar support as investors took the view the bold action would
sustain the U.S. economy and fuel a recovery later in the
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-percentage-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 percentage
point to 5.25 percent. It would be its second rate cut in three
Australia's dollar dropped even as benchmark borrowing
costs rose to an 11-year high of 7 percent. The Aussie dollar
traded down 1.3 percent at $0.8970 <AUD=>.
Analysts said trading on Tuesday showed little impact from
the race to be a nominated candidate in the U.S. presidential
election. Twenty-four of the 50 states were holding nominating
contests for the Democratic and Republican parties, and the end
of the day, known as Super Tuesday, could even see clear
winners for the final run to the November election.
(Additional reporting by Steven C. Johnson)
(Reporting by Nick Olivari and Vivianne Rodrigues. Editing by
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