CORRECTED-FOREX-Euro wallows near 10-week low on deflation fears

Sun Feb 2, 2014 7:23pm EST

(Corrects the dollar/yen's low in the 12th paragraph to 101.77, not 101.85)

* Easing euro zone inflation rekindles deflation worries

* Some see ECB cutting rates as soon as this week

* Emerging market nerves highlight risk, support yen

By Hideyuki Sano

TOKYO, Feb 3 (Reuters) - The euro licked its wounds near a ten-week low against the dollar on Monday after soft euro zone inflation data rekindled speculation the European Central Bank may ease policy to stave off deflation.

Worries about capital flight from emerging economies also kept investors at arms length from risk assets, underpinning the yen over growth-sensitive, high-yielding currencies.

The euro traded at $1.3489 in early Monday trade, not far from Friday's low of $1.3479, which was its lowest level since late November.

Against the yen, the common currency hit a two-month low of 137.38 yen, facing the risk of settling below its 100-day moving average, now at 137.54, which some chartists could regard as a major bearish signal.

The latest catalyst for the euro's fall was euro zone inflation data on Friday, which showed a surprise easing to 0.7 percent year-on-year in January, matching a four-year low touched in October.

Analysts had expected a rise to 0.9 percent from 0.8 percent in December.

The data spurred speculation that the European Central Bank could consider some form of monetary easing as soon as at its policy meeting on Thursday.

Although ECB President Mario Draghi said in January deflation was not threatening the euro zone, some countries are already suffering deflation and the International Monetary Fund warned deflation was a potential risk.

"We expect the euro zone inflation to slow further next month to 0.6 percent and to stay under one percent in March. We think the chance of rate cuts on Thursday is rising," said Shin Kadota, chief Japan FX strategist at Barclays.

In contrast, U.S. economic data on consumption was fairly robust, reinforcing views the world's biggest economy has can weather the emerging markets turmoil, enabling the Federal Reserve to keep reducing its stimulus.

That helped to keep the dollar index near a two-month high set late last month. The index of the dollar's value against six other major currencies stood at 81.271, a stone throw of 81.388 hit on Jan. 21.

The yen is also helped by safe-haven buying as investors remained wary of emerging economies. The dollar traded at 102.20 yen, near an eight-week low of 101.77 yen hit last Monday.

Since late last month, the prospect of a reduction in the U.S. monetary stimulus and slower growth in China have raised fear of capital flight in some emerging economies that rely on foreign capital.

Although many of these currencies, including the Turkish lira and South African rand, posted rebounds late last week, investors are not convinced if the worst is over. (Editing by Eric Meijer)

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