FOREX-Euro steady, rate cut views keep up pressure

(Changes byline, updates prices, adds quotes)

By Simon Falush

LONDON, Feb 12 (Reuters) - The euro held steady near last week's lows versus the dollar on Tuesday as a survey showing improved German investor sentiment did little to alter the view that the ECB is set to cut rates in the next few months.

German investor sentiment unexpectedly improved in February, rising to -39.5 this month from -41.6 in January, confounding expectations of a drop to -45.0, the ZEW research institute said. Click on [ID:nBAE001077].

However the current conditions indicator came in at 33.7, well below the consensus forecast of 50.8, indicating that investors are still jittery about how the economy is performing.

Following weak euro zone service sector data last week and a market interpretation that the European Central Bank may be softening its hawkish tone, investors moved to price in more than three interest rate cuts by year-end.

This sparked a big sell-off in the euro, resulting in its biggest weekly loss in 1-1/2 years versus the dollar.

"There was a significant change in language (from ECB president Jean-Claude Trichet) and the market is now focusing on risks to the downside," said Riccardo Barbieri, head of FX and rates strategy for Europe at Bank of America.

"Clearly firms are increasingly concerned about how the fallout from problems in the financial sector and the credit crisis will affect the real economy," he added.

By 1126 GMT, the euro was steady at $1.4522 -- less than a cent away from last Thursday's two week low EUR=.

It was also steady at 155.55 yen EURJPY=, while the dollar was a touch firmer at 107.06 yen JPY=.

The Japanese currency came under pressure as a recovery in equity markets made investors more willing to put on risky, high-yielding carry trade bets funded by cheap borrowing in the yen.

News that Credit Suisse reduced its total writedowns from the subprime crisis added to a more upbeat stock market mood.

RATE CUTS AWAITED

Sterling GBP= erased earlier gains after consumer price inflation in January came in below expectations paving the way for the Bank of England to cut rates.

However data from the British Retail Consortium (BRC) survey showing a rebound in sales in January, provided contrasting evidence on the health of the UK economy.

"The mixed data is consistent with our view that the BoE will not be very aggressive in the pace of its easing," said Calyon in a note to clients. "If it is not sure what to do, the MPC is most likely to do nothing and wait for more information."

Short sterling futures are discounting one more rate cut by June, and at least two further moves by year end.

A Reuters poll taken last week showed economists are anticipating a 25 basis point cut in the ECB's benchmark rate by June, followed by another cut in the third quarter.

European finance ministers on Monday said record-high inflation in the euro zone, while temporary, was of extreme concern, and vowed to help the European central bank stop price hikes from spilling over into higher wages. (Editing by David Christian-Edwards)