FOREX-Euro dips ahead of expected ECB rate cut
* Euro falls vs dollar ahead of ECB rate cut
* Market expecting 25 bps cut in main refinancing rate
* Euro underperforms growth-linked currencies
By Michelle Chen
LONDON, July 5 (Reuters) - The euro slipped against the dollar on Thursday and looked vulnerable to further selling as market players braced for a widely expected interest rate cut by the European Central Bank, which many doubt will solve wider debt issues in the euro zone.
The ECB is due to announce its decision at 1145 GMT, followed by a news conference by ECB President Mario Draghi. A Reuters poll of economists showed the majority expect the central bank to cut its main rate by 25 basis points to 0.75 percent, a new record low.
Most market players said a 25 basis point cut could prompt a sell-off, pushing the euro towards last week's lows just above $1.24, but the downside would be limited as the market is already positioned for a cut.
A bigger-than-expected cut of 50 basis points or any hints that emerge on how the ECB plans to respond to Europe's debt crisis, such as another long-term refinancing operation (LTRO), would be a bigger driver of market direction, analysts said.
"The bigger questions have to be over potential surprises. If the ECB were to signal something more aggressive like another LTRO, in this environment that could get a euro positive response," said Daragh Maher, currency strategist at HSBC.
"If they were to go for 50, for carry trade merchants that would be deeply negative but those who like rewarding currencies where you have policy pragmatism could see it as a positive."
The euro was down 0.1 percent against the dollar at $1.2506, holding above reported stop-loss sell orders at $1.2495. It remained below last week's high of $1.2693 hit after a European Union summit agreed to let euro zone rescue funds be used to stabilise bond markets and recapitalise banks.
Adding to pressure on the euro, surveys on Wednesday showed all of Europe's biggest economies are in recession or heading in that direction. Spain also paid higher premiums to sell its debt than at the previous auction.
Many market players said a rate cut would not tackle structural problems within the euro zone and the single currency will come under further selling pressure if no long-term measures are announced in the ECB news conference.
"It (the rate cut) is more of a symbolic gesture really. It does not change the finances of any country materially," said Patrick Armstrong, fund manager at Armstrong Investment Management, who expected the euro to fall to parity with the U.S. dollar in a year's time.
"We are very negative on the euro, we think all the structural overhangs on deleveraging, austerity and dealing with the debt all result in a very weak euro."
EURO LOWER ON THE CROSSES
Although the euro held within its range roughly between $1.24 and $1.27 against the dollar, it came under pressure against growth-linked currencies including the Australian dollar and Swedish crown.
The single currency traded at A$1.2164 versus the Australian currency, not far off a record low of A$1.2124 hit in February. It was also trading near a historical low against the New Zealand currency of NZ$1.5541 set on Wednesday.
Some analysts said although commodity currencies had benefited from an improvement in risk appetite after the EU summit deal, the longer-term outlook was clouded.
"While euro/Aussie may dip lower today with the ECB rate cut the Australian dollar is likely to come under pressure as signs of a global slowdown continue to emerge and we see further warning signals coming from China," said Ian Stannard, head of European FX strategy at Morgan Stanley.
The Swedish crown traded at 8.6675 crowns versus the euro, near an 11-1/2 year high of 8.6495 hit the previous day after the Riksbank kept interest rates on hold.
The Bank of England will also announce its rate decision on Thursday and is expected to launch another round of monetary stimulus to counter a recession and the effects of a worsening debt crisis in the euro zone.
Such a move may have little negative impact on sterling against the euro however, as worries about the euro zone crisis outweigh concerns easing can weaken a currency.
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