* Easing euro zone inflation rekindles deflation worries
* Some see ECB cutting rates as soon as this week
* Emerging market nerves highlight risk, support yen
* Market looks to U.S. ISM data for more sign of robustness
By Hideyuki Sano
TOKYO, Feb 3 The euro licked its wounds near a
10-week low against the dollar on Monday after soft euro zone
inflation data rekindled speculation the European Central Bank
may ease policy to stave off deflation.
Worries about capital flight from emerging economies also
kept investors at arms length from risk assets, underpinning the
yen over growth-sensitive, high-yielding currencies.
The euro traded at $1.3489 in early Monday trade, not
far from Friday's low of $1.3479, which was its lowest level
since late November.
Against the yen, the common currency hit a two-month low of
137.38 yen, facing the risk of settling below its
100-day moving average, now at 137.54, which some chartists
could regard as a major bearish signal.
The latest catalyst for the euro's fall was euro zone
inflation data on Friday, which showed a surprise easing to 0.7
percent year-on-year in January, matching a four-year low
touched in October.
Analysts had expected a rise to 0.9 percent from 0.8 percent
Given that the ECB surprised markets by cutting rates in
November, a week after the same inflation data showed a 0.7
percent reading, speculation is rife that the ECB could consider
another monetary easing as soon as at its policy meeting on
"We expect the euro zone inflation to slow further next
month to 0.6 percent and to stay under one percent in March. We
think the chance of rate cuts on Thursday is rising," said Shin
Kadota, chief Japan FX strategist at Barclays.
By contrast, U.S. economic data on consumption was fairly
robust, reinforcing views the world's biggest economy can
weather the emerging markets turmoil, enabling the Federal
Reserve to keep reducing its stimulus.
That helped keep the dollar index near a two-month high set
late last month. The index of the dollar's value against six
other major currencies stood at 81.271, a stone's throw
away from 81.388 hit on Jan. 21.
"The strength of U.S. data is outstanding. U.S. bonds are
clearly being bought as a safe haven now," said a trader at a
The dollar could gain more footing if the Institute for
Supply Management's closely watched data due at 1500 GMT points
to solid growth in U.S. manufacturing.
Against the yen, the dollar gained 0.3 percent to 102.34
yen, as Japanese importers bought the dollar on dips after the
yen's gains on concerns about emerging markets.
Still, the U.S. currency stood not far from an eight-week
low of 101.77 yen hit last Monday as investors remained wary of
Since late last month, the prospect of a reduction in U.S.
monetary stimulus and slower growth in China have raised fear of
capital flight in some emerging economies that rely on foreign
Although many of these currencies, including the Turkish
lira and South African rand, posted rebounds late
last week, investors are not convinced if the worst is over.