FOREX-Sterling slumps on dovish inflation report; euro holds gains vs dollar
* Sterling broadly weaker, hits 1-month low vs dollar on BoE report
* Euro recovers from one-month low below $1.37
* Yen strengthens vs dollar and euro (Updates prices, adds IMF deflation odds in euro zone)
By Daniel Bases
NEW YORK, May 14 (Reuters) - The British pound fell from a 16-month high versus the euro and dropped to a one-month low against the dollar on Wednesday after the Bank of England surprised investors by saying it has no plans for near-term monetary tightening.
"(The pound) had been the cat's meow up until this morning's employment numbers and BOE inflation report. The market was clearly positioned for a more aggressive MPC (Monetary Policy Committee) and they didn't get that," said Lane Newman, director of foreign exchange for ING Capital Markets.
The euro held modest gains against the dollar while slumping to a 2-1/2 month trough versus the yen, despite the aid of steady purchases by Asian central banks keen to curb the strength of their own currencies.
Central bank interventions such as those by South Korea and China have stemmed the euro's losses in the face of growing expectations the European Central Bank will loosen monetary policy in June in an effort to stem deflationary pressures.
The International Monetary Fund's chief economist put a 25 percent chance on the euro zone slipping into deflation by the end of 2015.
"It is a sell into the rally for the euro/dollar on the assumption that the ECB goes for negatives rates and that reverse managers will be looking to reduce some of their euro-cash exposure to avoid deposits in negative interest rates," said Sebastian Galy, senior currency strategist at Societe Generale.
Reuters on Wednesday quoted sources as saying the ECB was preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.
Unexpectedly higher U.S. producer price inflation in April, the largest increase in 1-1/2 years, caused some short-lived dollar buying.
The euro rose above the $1.3700 level but retested it five times. It was last up 0.07 percent at $1.3712.
Against sterling, the euro rose 0.40 percent to 81.77 pence, rebounding from a fresh 16-month low of 81.26 pence.
The euro hit a 2-1/2 month low of 139.42 yen, down 0.45 percent. The greenback dropped 0.41 percent to 101.83 yen .
Sterling lost ground after the Bank of England deflated expectations it might raise interest rates in less than a year's time, saying Britain's economic recovery remained in its early stages. It also noted a strong bounce-back in the job market and lowered its forecast for unemployment for the next couple of years.
Sterling hit a one-month low of $1.6753 after the report was released, from around $1.6820. It last traded down 0.36 percent at $1.6768.
In the report, the BoE noted sterling's appreciation was putting downward pressure on inflation. (Additional reporting by Patrick Graham and Anirban Nag in London, Ian Chua in Sydney and Masayuki Kitano in Singapore; Editing by Paul Simao and Chris Reese)
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