* Euro zone economy contracted more than expected in 4th
* Investors look to G20 meeting for 'currency war' talk
* G20 FX text may differ from G7, but same intent - Russia
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 14 The euro dropped to a
three-week low against the dollar and fell sharply versus the
yen on Thursday after data painted a bleak picture of the euro
zone economy, raising expectations the European Central Bank
will cut interest rates.
The yen, meanwhile, rallied from recent multi-year lows
against the dollar as investors grew cautious a day ahead of a
meeting of Group of 20 finance officials where exchange rates
are expected to be an important topic. A particular focus would
be on the yen's recent weakness.
It was the third straight day of gains for the yen, rising
1.5 percent. That was the best three-day advance for thre
Japanese currency in three weeks.
After being overshadowed by the yen the last few sessions,
the euro regained the market's attention after a report showed
the euro zone economy shrank by 0.6 percent in the last three
months of 2012, a steeper decline than the 0.4 percent drop
forecast in a Reuters poll.
Germany and France, the two largest economies of the
17-nation euro zone, also shrank by more than expected in the
final quarter, casting doubt on forecasts of a recovery in early
"With the growth outlook trimmed, the ECB must show a
willingness to remain flexible with regard to monetary policy to
avoid a deeply entrenched recession that could be devastating,"
said Sean Cotton, vice president and foreign exchange advisor at
Bank of the West in San Ramon, California.
The euro last traded at $1.3356, down 0.7 percent,
after hitting a three-week low of $1.3313. The euro had hit a
one-week high of $1.3520 on Wednesday and a 15-month high of
$1.3711 on Feb. 1.
Against the yen, the euro was last at 124.01 yen,
down 1.3 percent on the day.
Valentin Marinov, currency strategist at CitiFX in London
said the euro's recent weakness was consistent with indications
that the market got excessively long the currency across the
An "aggregate misevaluation" indicator developed by CitiFX
showed that that euro has appreciated in excess of fundamentals,
Marinov said, and the currency could drop further in the near
term if investors continue to unwind longs.
Euro zone banks' next repayment of emergency loans to the
ECB later this month could also weigh on the euro, analysts
said. These banks are expected to repay a lower amount than they
did last month and cause the ECB's balance sheet shrink at a
The euro is up around 1.0 percent against the dollar and
about 8.4 percent against the yen this year, largely a result of
an improved appetite for risk and differing global central bank
G20 IN FOCUS
The Group of Seven nations said this week fiscal and
monetary policies must be directed at domestic economies and not
at targeting exchange rates. But confusion reigned after a G7
official said the statement was aimed at Tokyo, a comment that
prompted the yen to surge on a volatile foreign exchange market.
Other G7 countries later said it should be taken at face
Host Russia said the G20 meeting in Moscow would back the
thrust of a Group of Seven statement on currencies, but
indicated there was still haggling over the final wording.
Frances Hudson, global thematic strategist at Standard Life
Investments in Edinburgh, Scotland said she doesn't expect Japan
to be singled out for its currency policy at the G20 meeting.
But if the G20 does call out Japan, some of the countries within
the group would be on weaker ground, she added.
"There are countries within the G-20 that actually set
exchange rate targets. And that isn't what Japan is doing,"
"Japan is doing what seems to be actions for economic
reasons, such as tackling deflation. Japan didn't come out and
say our objective is a weaker yen. Its objective is to achieve
Standard Life manages assets of about $263.9 billion.
Against the yen, the dollar was down 0.6 percent at
92.87 yen, well below a 33-month high of 94.42 hit on Monday. It
hit a low of 92.65 yen in late trade.
Earlier, the Bank of Japan kept policy steady as expected
and revised up its assessment of the Japanese economy. Some
believe the bank may hold off on expanding stimulus next month
and wait until its first rate review under a new governor,
scheduled for April 3-4.