* Euro hits two-month low vs dollar
* Expectations grow of euro zone quantitative easing
* Dollar gains vs yen after recent losses
By Laurence Fletcher
LONDON, Feb 3 The euro was soft on Monday as
investors thought it more likely the European Central Bank would
have to ease policy in a radical way to combat slowing
inflation, with the bank meeting later this week.
With trading volumes still subdued after Friday's Lunar New
Year holiday in Asia, investors are also eyeing a U.S.
manufacturing purchasing managers' index on Monday for direction
on the strength of the U.S. economy. Non-farm payrolls data on
Friday also loom, after last month's low number shocked
The euro fell as far as $1.3479 in early Monday
trade, equaling Friday's low of $1.3479, which was its weakest
level since late November. It was last down marginally at
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. It later recovered to
137.63 yen, down marginally on the day.
Investors' nervousness over the euro intensified on Friday
after euro zone inflation data showed a surprise drop to 0.7
percent year-on-year in January, compared with analysts'
expectations of a 0.9 percent rise.
With interest rates already at a record low of 0.25 percent,
analysts increasingly expect the ECB to start buying sovereign
bonds to loosen monetary conditions.
"What really matters is deflation," said Hans Redeker, head
of global currency strategy at Morgan Stanley. "The euro is
going to find it very difficult to hold its value.
"I think that with a ... fall in inflation and the
development of deflation expectations the only credible
instrument is outright QE (quantitative easing). It's not the
best tool, but there's no other tool available."
The euro dipped 0.3 percent against the Swedish crown to
8.7993 crowns after the Swedish manufacturing
purchasing managers' index beat forecasts.
Global markets have been affected in recent days by a sharp
sell-off in emerging markets, which has pushed up the value of
the yen, traditionally seen as a safe haven.
The U.S. PMI and payrolls data on Friday could signal the
U.S. economy is growing fast enough for the Federal Reserve to
keep cutting back its bond-buying programme - a move that
encourages investors to pull back money from emerging markets to
"If the PMI is relatively strong, the possibility that will
lead to a further eruption (in emerging markets) is quite high,"
added Morgan Stanley's Redeker, who expects dollar-yen to fall
to 98 in the coming four weeks.
Against the yen, the dollar gained 0.2 percent at 102.19 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