FOREX-Euro weak as focus shifts to sluggish economy, ECB

Thu Nov 8, 2012 4:40am EST

Related Topics

* Euro weaker as economic worries around bloc mount

* Markets to focus on ECB rate decision

* Risk sentiment hit by U.S. fiscal cliff woes

By Anooja Debnath

LONDON, Nov 8 (Reuters) - The euro hit a two-month low against the dollar and was close to a four-week low versus the yen on Thursday, as investors edgy about the currency bloc's growth prospects sold it before an ECB policy decision.

While the European Central Bank was expected to keep interest rates on hold, some analysts say grim euro zone data, including from Germany, might prompt it to ease policy before the end of the year.

Comments from ECB President Mario Draghi, who said on Wednesday the bank expected the euro zone economy to remain weak "in the near term," added to investor nervousness.

The European Commission said on Wednesday the euro zone economy will barely grow next year, forecasting slower growth than governments in the bloc's biggest economies expect.

"There are fewer and fewer ways of expressing a negative view against the euro zone other than going short the euro and that is what we are seeing," said Peter Kinsella, currency strategist at Commerzbank.

"Weak data recently has certainly increased the likelihood of a rate cut later this year. With the downgrade by the EC, it will probably be tough to implement austerity measures in the euro zone."

The euro was down 0.3 percent at $1.2733, a two-month low, and down 0.4 percent at 101.72.

A raft of weak economic data supports the case for a cut in ECB interest rates and some investors expect Draghi to lay the ground for easier policy at a post-meeting news conference.

Investors were also keeping an eye on an uction of 3.5-4.5 billion euros of Spanish bonds, including a new five-year issue and 20-year debt -- the longest dated paper to be sold at an auction since mid-2011.

The auction will be a gauge of interest in longer-term investment in Spain, which is at the forefront of the euro zone crisis, and a successful sale could allow it to further delay a request for aid that many in markets see as inevitable.

The sale is expected to go smoothly after the Greek parliament approved, as expected, austerity measures needed to unlock aid and avert bankruptcy, briefly nudging the euro higher.

U.S. FISCAL CLIFF

The dollar index hit a two-month high of 80.926.

The dollar strengthened on Wednesday on safe-haven demand, as focus quickly shifted from President Barack Obama's re-election to the "fiscal cliff" that threatens to push the U.S. economy into a renewed recession next year.

About $600 billion in government spending cuts and higher taxes will kick in early next year, unless U.S. lawmakers take steps to reduce the deficit.

"Following President Obama's election victory, we believe markets will begin to price in the eventuality of temporarily going over the fiscal cliff as the likelihood of a short-term compromise declines," Barclays Capital analysts wrote in a client note.

The dollar slipped 0.1 percent to 79.91 yen, staying below a six-month high of 80.68 yen set last week.

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