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Thursday November 6, 2008 - 10:17:47 GMT
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FOREX NEWS-Euro down before ECB, yen firm on risk aversion

Thu Nov 6, 2008 4:50am EST

* Euro down vs dollar ahead of anticipated ECB rate cut

* ECB, BoE expected to ease rates by 50 bps or more

* Yen broadly higher as falling shares spur risk aversion

* European shares down 3 pct, Nikkei closes down 6.5 pct

(Recasts, changes dateline prvs TOKYO)

By Tamawa Kadoya

LONDON, Nov 6 (Reuters) - The euro was lower against the dollar and yen on Thursday ahead of a widely anticipated rate cut by the European Central Bank, while the dollar and low-yielding yen gained on risk aversion as shares fell.

Investors expect the ECB to cut borrowing costs by 50 basis points or more from the current 3.75 percent.

While a 50 basis point cut is the consensus forecast [ECB/INT], some interest rate futures indicate a cut of up to 75 basis points is already discounted. The ECB decision is due at 1245 GMT.

Markets also anticipate the Bank of England will cut interest rates -- now at 4.5 percent -- by at least half a percentage point, but many see the outcome as less certain with some forecasting a cut as big as a full percentage point to prop up a sharply deteriorating economy.

The BoE will announce its decision at 1200 GMT.

The ECB and BoE have already cut interest rates by 50 basis points last month in a coordinated move.

Bigger rate cuts are usually negative for a currency as they shrink its interest rate differential against other currencies, making it a less attractive investment.

But as the market focuses on the possibility of a prolonged economic downturn, it could put more emphasis on the potential for a substantial cut to stimulate the economy.

"If the cuts are bold enough, it would be positive for the euro and the pound," said Ian Stannard, senior currency strategist at BNP Paribas.

At 0852 GMT, the euro <EUR=> was down 0.4 percent at $1.2907.

Sterling <GBP=> was nearly flat against the dollar at $1.5930.

Falls in global share prices on concerns of a prolonged global economic downturn prompted investors to pull back from riskier investments, benefitting the dollar .DXY and the low-yielding yen.

European shares fell roughly 3 percent in early trade, while Tokyo's Nikkei average closed down 6.5 percent .N225.

The yen rose broadly, with the dollar dipping 0.4 percent to 97.94 yen <JPY=> and the euro dropping 0.8 percent to 126.45 yen <EURJPY=R>.

The dollar slipped, reversing an initial rally on Tuesday following the announcement that Democrat Barack Obama had won the U.S. presidential election.

"After digesting Barack Obama's success in winning the U.S. presidency, investors have shifted their focus back to conditions in the real economy," UBS analysts said in a research note.

Data on Wednesday showed the euro zone service sector slumping to a fresh decade low, adding to the view that the ECB may deliver a big rate cut. [ID:nL4658233]

Market players will also be closely watching comments by ECB President Jean-Claude Trichet at a 1330 GMT news conference.

"As both weakening growth conditions and depreciating crude oil prices keep inflation expectations in a clear downtrend, we expect ECB President Trichet will keep a dovish rhetoric, leaving doors open for further easing in rates," UBS said.

(Editing by Ruth Pitchford)

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