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Tuesday January 6, 2009 - 12:39:36 GMT
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FOREX NEWS-Euro falls broadly as euro zone inflation slides

FOREX-Euro falls broadly as euro zone inflation slides

Tue Jan 6, 2009 7:34am EST

* Euro hits 3-week lows vs dollar, sterling

* Dollar hits 1-month high vs yen at 94.21 yen <JPY=>

* EZ inflation plunges to 26-month low in December

(Changes byline, adds comment, updates prices)

By Naomi Tajitsu

LONDON, Jan 6 (Reuters) - The euro fell broadly on Tuesday, hitting a three-week low versus the dollar after a fall in euro zone inflation added fuel to views that the European Central Bank will continue cutting rates as price pressures ease.

Losses in the euro prompted broad dollar gains, with the U.S. currency climbing above 94 yen against the Japanese unit to its highest level since the start of December, while the dollar index hit its highest in three weeks.

The single currency fell to its weakest since mid-December to the dollar and sterling after inflation in the region came in at 1.6 percent on the year from 2.1 percent in November to its lowest level in more than two years [ID:nL6532861].

The ECB targets inflation at just under 2 percent, and many in the market consider a fall below that level as keeping the door open to more aggressive rate cuts from the current 2.5 percent to deal with a deteriorating economy.

"(The data) will further free the ECB to cut interest rates at next week's meeting," said Adam Cole, global head of currency strategy at RBC in London.

"The balance of news from Europe is so poor that the market is perceiving that the ECB is behind the curve (on rates)," which was driving recent weakness in the euro, he said.

The ECB is expected to cut its key lending rate by 50 basis points or more at its policy meeting next week. In the run-up to the gathering, ECB officials have been suggested that rates could come down more in the future.

At 1216 GMT, the euro had fallen roughly 2 percent to $1.3331 to its weakest since Dec. 12.

Against sterling, the single currency fell roughly 1.5 percent to 91.00 pence according to Reuters data, its lowest since Dec. 17. The pair has tumbled dramatically after hitting a record high of 98.05 pence last week.

The dollar rallied across the board, climbing as high as 94.21 yen <JPY=> according to Reuters data, its highest since the start of December. Against a basket of currencies .DXY, the dollar rose as high as 83.871, its strongest in more than three weeks.


Tuesday's dismal data comes on the heels of an index of the euro zone private sector services economy which fell to its lowest in the survey's 10-year history and suggested that the region will be in a deep recession for at least much of 2009 [ID:nL6511784].

Growing evidence that the economy is suffering while inflation pressures ease has ripened conditions for lower rates even as the ECB slashed rates from 4.25 percent since October.

On Monday, ECB Governing Council member Vitor Constancio said monetary policy would respond with interest rate cuts to maintain inflation around 2 percent if necessary. [ID:nL5259330]

"European monetary policy does not only worry that inflation rises a lot, but also if it falls a lot," he said in Lisbon.

That follows remarks by ECB Vice President Lucas Papademos, who said on Sunday that more rate cuts may be warranted to shield the euro zone from recession. [ID:nL54973]

The ECB has cut interest rates to help the euro zone economy but the euro still enjoys a comparative advantage over peers such as the dollar and the yen, with euro zone rates at 2.5 percent versus close to zero in the United States and Japan.

But the euro's recent declines indicate that it will no longer be immune from the region's poor economic data.

"Despite the weakening euro zone economy, the euro had a free ride for the last couple of months of 2008, piggybacking on the market's more negative view of other economies, in particular that of the United States and Britain," said strategists at Calyon in a note.

(Editing by Andy Bruce)

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