(Recasts, updates prices)
By Kevin Plumberg
NEW YORK, Feb 6 (Reuters) - The euro drifted lower on Wednesday, with
investors expecting the European Central Bank's vigilant stance on inflation to
give way to concerns about economic growth following a decision on interest
rates on Thursday.
The ECB is expected to keep the benchmark euro zone interest rate at 4
percent -- a full percentage point above the U.S. federal funds rate -- leaving
the focus on whether the central bank's president, Jean-Claude Trichet, will
stick to his hawkish stance amid signs of slowing growth in Europe.
Currency strategists at BNP Paribas doubt the ECB will be able to maintain a
vigilant stance on inflation.
"Even if it does, the euro is unlikely to benefit since European growth seems
to be in free fall, suggesting an overly tight monetary policy could hit the
ECB's credibility," the group's foreign exchange strategists wrote in a note to
"We see the euro trading lower against the dollar, the yen, the Swiss franc
and the pound."
By late afternoon in New York, the euro was trading down 0.1 percent from
late Tuesday at $1.4620 <EUR=>, near the middle of a $1.4966-to-$1.4308
range that the currency has remained in since mid-November.
The euro was down 0.4 percent at 155.67 yen <EURJPY=>. Against the
Swiss franc, the euro slipped 0.4 percent to 1.6045 francs <EURCHF=>.
The dollar was down 0.3 percent at 106.45 yen <JPY=>, weighed by a
late-session decline in U.S. stock indexes.
Futures markets already reflect expectations that the ECB will cut rates by a
half percentage point by the third quarter FEIU8, but are split on chances of a
further quarter-point easing by year end.
The Bank of England will also be meeting on Thursday as well. Investors are
expecting UK interest rates to be cut to 5.25 percent from 5.5 percent.
"Less-than-favorable data indicating slowing growth in both regions suggests
central bankers will take a more dovish stance at tomorrow's announcement," Evan
Mahoney, an analyst with Wells Fargo Bank, said in a note.
EURO BULLS BEWARE
Investors had earlier bought the yen as Asian stocks posted their biggest
loss in two weeks on worries about the health of the global economy, dampening
investors' appetite for riskier assets. In such an environment, investors who
have borrowed the Japanese currency to fund purchases of higher-yielding assets
-- in what are known as carry trades -- tend to buy the yen back to reduce risk
and cover their positions.
U.S. stocks struggled throughout Wednesday's session, then finally went into
the red late in the afternoon, pushing up the yen.
"There's been some discussion about carry trades in this environment, and the
yen gains are consistent with higher risk aversion," said Camilla Sutton,
currency analyst at Scotia Capital in Toronto.
Worries about the global economic outlook were stoked on Tuesday by a sharp
fall in the Institute for Supply Management's non-manufacturing index, a gauge
of the vast U.S. service sector, which posted its biggest monthly decline on
There were also signs that the slowdown will not be limited to the United
States. Euro zone retail sales fell in December despite Christmas shopping,
while growth in the bloc's service sector slowed almost to a standstill in
Reports such as these have fed speculation that the euro has yet to weaken
the way that the dollar did last year when the credit crisis began to imperil
the U.S. economy.
Indeed, analysts at Citigroup who focus on currency flows among the bank's
clients said that institutional investors, which usually make medium- to
longer-term bets, over the last five weeks have been unwinding their bets on
euro strength that helped push the single currency to record highs late last
"We warn that the EUR/USD rally may now be over," CitiFX Flows analysts said
in a note. (Editing by Jonathan Oatis)