June 5, 2014 / 7:17 PM / 3 years ago

FOREX-Euro holds ground after ECB launches fight against low inflation

(Adds comment, updates prices)

* Euro ricochets off four-month low vs USD after ECB cuts interest rates

* ECB for first time uses negative rates to boost lending

* U.S. payrolls report on Friday not expected to move Fed policy

* New Zealand dollar gains 1 pct on greenback

By Daniel Bases

NEW YORK, June 5 (Reuters) - The euro rebounded from four-month lows on Thursday, brushing aside the European Central Bank's decision to cut interest rates and announce an array of measures to loosen monetary policy in order to halt a disinflation trend.

The ECB cut all its main rates to record lows in a drive to fight off the risk of a Japan-like deflation and bring down the euro's exchange rate. For the first time, it will charge banks 0.10 percent for parking funds at the central bank overnight.

The euro traded in a tight range heading into the ECB decision, coming one day before the U.S. payrolls report that is expected to show slowing employment growth but unlikely to affect a change in loose U.S. monetary policy.

ECB President Mario Draghi stopped short of large-scale asset purchases known as quantitative easing, which is meant to keep interest rates low and spur borrowing. Draghi said more action would come if necessary.

Inflation expectations were revised lower by the ECB, however, pulling them farther away from its 2 percent target.

"I think that highlights that inflation is trending significantly lower and below (market) expectations and so I think part of the concern is, is the ECB already too late and will they live up to their words," said Camilla Sutton, currency strategist at Scotia Capital in Toronto.

The euro fell sharply after the ECB's announcements, hitting a fresh four-month low of $1.3504, according to Thomson Reuters data. However, it slowly ground its way back from those losses to $1.3658, a gain of 0.44 percent on the day.

Still, the medium-term outlook for the euro is weakness, says one analyst.

"The contrast between the ECB becoming more accommodative and the Fed (U.S. Federal Reserve) providing less accommodation underlies our view of a weaker euro," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.

Against Japan's currency, the euro recovered ground in similar fashion, rising 0.09 percent at 139.82 yen.

Specifically, the ECB cut the deposit rate to -0.10 percent, the main refinancing rate to 0.15 percent, and the marginal lending rate - or emergency borrowing rate - to 0.40 percent.

After hitting a four-month high of 81.020, the dollar index gave up its gains to trade down 0.38 percent at 80.359.

The dollar lost 0.39 percent to 102.33 yen, down slightly from a one-month high of 102.80 yen set on Wednesday. It is holding at its 100-day moving average of 102.32.

A drop in U.S. Treasury yields undermined the greenback against so-called commodity currencies and those in emerging markets. The New Zealand dollar gained over 1 percent against the U.S. dollar. (Additional reporting by Anirban Nag in London; Editing by Ruth Pitchford, Nick Zieminski and Tom Brown)

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