FOREX-Euro slides below $1.34, eyes on Fed and U.S. GDP

Wed Jul 30, 2014 4:32am EDT

Related Topics

* Euro touches fresh eight-month low vs dollar

* German inflation data in focus

* Dollar index holds firm, hits fresh six-month peak

* Eyes on U.S. Q2 GDP, Fed statement later on Wednesday (New throughout, new quote, updates prices, changes dateline, previous SYDNEY/SINGAPORE)

By Jemima Kelly

LONDON, July 30 (Reuters) - The euro fell below $1.34 on Wednesday for the first time since last November before German inflation data that was likely to add to the case for the European Central Bank pumping more money into a moribund economy.

The first batch of regional German data showed inflation falling well below 1 percent even in the euro zone's strongest economy just as prices in Spain, Greece and Portugal are falling.

The contrast between that picture and an increasingly robust U.S. recovery is one factor behind the dollar's rise this week to a six-month high against a basket of major currencies.

A Federal Reserve policy decision and statement later on Wednesday will be looked to for any hint of when U.S. interest rates could be raised next year. Second quarter gross domestic product data is also due at 1230 GMT.

The euro hit a fresh eight-month low of $1.3395 before recovering to $1.3400, down around 0.1 percent on the day. .

Traders said if German consumer price data, due at 1200 GMT, came in below forecast, it would put more pressure on the ECB but that further easing was not likely soon given its recently announced package of cheap long-term loans to banks.

"Given that they've just announced a package of easing measures - the target LTROs (long-term refinancing operations) won't even take place until September and December - I think the ECB is willing to take some times," said Lee Hardman, a currency economist at the Bank of Tokyo-Mitsubishi UFJ.

The Fed is expected to cut its monthly bond-buying programme by another $10 billion on Wednesday and may also hint at an approaching hike in interest rates in light of labour market growth, with unemployment at its lowest in six years.

"A more dovish than expected outcome with few changes could see a reversal of recent USD buying, but the introduction of new language on the impact of stronger labor markets following (Fed chair) Yellen's recent remarks would still be a significant hawkish surprise," Citi analysts said in a note.

Against a basket of major currencies, the dollar touched a high of 81.283, its strongest level in six months.

EURO PRESSURE

Worries about tension in Ukraine and concerns that sanctions against Russia would have a negative economic impact on Europe have weighed on the euro recently, said Bart Wakabayashi, head of foreign exchange for State Street Global markets in Tokyo.

"This is something that everyone has been saying for six months or so now, but there has recently been some confirmation of that," Wakabayashi said, adding that such issues were unlikely to go away soon.

A survey released late last week had shown that German business sentiment fell to its lowest level in nine months in July, adding to signs that Europe's largest economy is slowing and suggesting that firms are worried about the crises in Ukraine, Iraq and Gaza.

Another European economy, Sweden, said its economy grew less than expected in the second quarter, driving the crown to its weakest against the dollar in two years at 6.8935 crowns per dollar.

On Tuesday, the European Union and the United States announced further sanctions against Russia, targeting its energy, banking and defence sectors in the strongest international action yet over Moscow's support for rebels in eastern Ukraine.

The dollar hit a three-week high of 102.19 yen. (Additional reporting by Ian Chua in Sydney and Masayuki Kitano in Singapore, editing by Nigel Stephenson)

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