* Weak euro zone inflation data spur view on more ECB action
* Dollar index poised for best monthly gain in 8 months
* Emerging market jitters, Japanese inflation boost yen
* Canadian dollar falls to 4-1/2 year low on sluggish growth
By Richard Leong
NEW YORK, Jan 31 The euro fell on Friday as soft
euro zone inflation data rekindled concerns the European Central
Bank may have to act to combat deflation, while the dollar
strengthened on mildly encouraging data to close out its best
month since May.
Nagging worries about emerging market woes spreading
underpinned safe-haven buying for the yen.
"The focus on the euro is that we could see a policy
response from the ECB next week," said Shaun Osborne, chief
foreign exchange strategist at TD Securities in Toronto.
Euro zone inflation data on Friday showed a surprise drop to
0.7 percent year-on-year in January. Analysts had expected a
rise to 0.9 percent.
The fall could be a trigger for further easing by the ECB,
which holds its policy review next week, to sustain a fragile
recovery and ward off a falling price spiral that could cripple
the economy for years.
The euro fell 0.5 percent against the dollar at $1.3484
after touching its lowest level since late November.
The single currency also hit a two-month trough against the
yen, last down 0.9 percent against the Japanese currency at
The euro is on track to suffer its biggest monthly drop
versus the dollar in 11 months and the steepest monthly decline
against the yen since July 2012.
Trading volumes were light with large parts of Asia on
holiday for the Lunar New Year.
Meanwhile, risk aversion hit commodity-related currencies,
with the Canadian dollar falling to a 4-1/2-year low. The loonie
last traded at C$1.1176 per dollar in the wake of
weaker-than-expected data on Canadian growth in November.
The sell-off in the euro and emerging market currencies like
the Turkish lira and South African rand this week
has benefited the yen - last year's weakest major currency - as
the dollar fell 0.6 percent to 102.08 yen on Friday.
There were large month-end option expiries at the 102.25 and
103 yen, according to one trader.
Another boost to the yen was Japan's core consumer price
inflation, which accelerated to 1.3 percent in January, the
highest level in five years.
GOOD JANUARY FOR DOLLAR
The dollar index rose 0.2 percent to 81.23, helped by
solid U.S. October-December growth numbers, which revived hopes
that the global economy could, on the whole, take troubles from
emerging markets in stride.
The dollar index has risen more than 1 percent in January
and is poised for its biggest month gain since May.
Friday's data on U.S. consumption, Midwest manufacturing and
consumer sentiment reinforced the notion the world's biggest
economy has some cushion to weather the emerging markets turmoil
and reduced stimulus from the Federal Reserve.
"The dollar has emerged from this tapering better than we
had thought," TD's Osborne said.
There was also talk in the market that emerging market
central banks may buy back dollars.
"That is a possibility," said Adam Cole, head of G10 FX
strategy at RBC Capital in London. "If you've seen intervention
to support their currencies then they'd be recycling to
replenish dollars (that they'd spent propping up their own
Data from the Federal Reserve late Thursday hinted some
foreign central banks sold their Treasuries holdings to raise
cash and buy their own currencies on the open market in a bid to
stabilize them from further damage due to emerging market
Overall foreign holdings of securities such as Treasuries,
mortgage-backed securities and agency debt at the U.S. central
bank fell by $20.77 billion to $3.325 trillion in the week ended
Wednesday, led by a $20.66 billion drop in Treasury holdings. It
was the largest weekly decline for both since June, the Fed data