FOREX-Euro slips to 2-week low as talk of looser ECB policy grows
* Euro falls for fifth day as inflation data fuels ECB rate cut talk * Euro on pace for worst weekly loss since July, 2012 * BNP Paribas expects ECB rate cut in December, UBS expects next week * Euro/dollar implied vols jump on renewed spot weakness By Julie Haviv NEW YORK, Nov 1 (Reuters) - The euro hit a two-week low against the dollar on Friday, extending losses to a fifth day as slowing euro zone inflation raised expectations of a European Central Bank rate cut by the end of the year. With a cut seen eroding the euro's interest rate advantage over other major currencies, the currency was poised to notch its worst weekly loss against the dollar since July, 2012. The euro's losing streak against the greenback also marked its longest stretch in two months, but its weakness was broad-based, hitting near three-week low against the yen and a two-week trough against sterling. On Thursday data showed inflation falling to a four-year low of 0.7 percent in October, way under the ECB's target of just below 2 percent. "We have seen a lot of selling pressure on the euro, some of it was month-end related (positioning) and some of it was related to expectations of an ECB rate cut," said Vassili Serebriakov, foreign exchange strategist at BNP Paribas in New York. Serebriakov said while BNP Paribas is not expecting an ECB rate cut at its November meeting, it is forecasting one at the December meeting. "When the euro reached $1.38 last month it felt overbought," he said. "Yesterday we adjusted our year-end forecast for the euro to $1.32". The euro fell to $1.3497 in early New York trade, its lowest since Oct. 16. It was last down 0.6 percent at $1.3504 after having fallen 1.1 percent on Thursday, its biggest one-day drop in more than six months. The euro at current levels is poised to end the week 2.2 percent lower, which would mark the largest percentage loss since the week ended July 6, 2012. The euro's losses triggered fresh demand to hedge against further weakness with one-month euro/dollar implied volatilities hitting their highest in three weeks at 7.2 percent. "In light of those inflation numbers, we have changed our call and are now expecting the ECB to cut its main refinance rate at next week's meeting," said Geoffrey Yu, currency strategist at UBS. "While some in the market have priced that in, quite a few haven't. We recommend investors to hold short positions in the euro and add to those positions after the ECB meeting." A depressed euro zone labor market, with unemployment still at record highs in September, will give the ECB another reason to consider easing policy at next Thursday's meeting. Thursday's jobs report included revisions to previous months' data, bolstering a widely held view that an elevated currency is the last thing euro zone policymakers want. Options traders cited renewed demand for euro puts, or bets the currency will fall. One-month risk reversals - a measure of relative demand for options on a currency rising or falling - were in favor of euro puts. Just a week ago, there was a slight bias for euro calls - or bets it would gain. Renewed pressure on the euro saw the dollar index rise to a two-week high of 80.623, pulling further away from a nine-month trough of 78.998 plumbed a week earlier. The dollar held gains after data showed the pace of growth in the U.S. manufacturing sector hit a one-year-low in October as factory output slowed sharply. The dollar last traded up 0.1 percent against the yen at 98.42 yen, according to Reuters data.
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