* Expectations grow of euro zone quantitative easing
* Dollar falls vs yen, investors wary of emerging markets
By Laurence Fletcher
LONDON, Feb 3 The euro hit a two-month low
against the dollar on Monday as expectations grew of radical
European Central Bank action to head off the risk of deflation,
while emerging market gloom helped push the U.S. currency down
versus the yen.
The euro, which fell on Friday after weaker-than-forecast
inflation data from the currency bloc, also plumbed a two-month
trough against the yen and dropped to its lowest in more than
six weeks against the Swiss franc.
The euro tumbled as far as $1.34765, its weakest
since late November. It later recovered some ground to trade up
0.1 percent at $1.3499.
Euro zone inflation for January showed a surprise drop to
0.7 percent year-on-year. Analysts had expected prices to rise
With the ECB's main interest rate already at a record low
0.25 percent, some analysts expect the central bank 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 common currency fell to 137.35 yen, facing the
risk of settling below its 100-day moving average, now at
137.54, which some chartists regard as a bearish signal. It
later recovered to 137.50 yen, down 0.1 percent on the day.
The dollar dropped to as low as 101.67 yen, its
weakest since early December as investors remained wary of
emerging economies and sought shelter in the Japanese currency.
A sharp sell-off in emerging currencies in recent days has
supported the yen broadly.
With trading volumes still subdued after Friday's Lunar New
Year holiday in Asia, investors were looking to U.S.
manufacturing purchasing managers' data later on Monday for
direction on the strength of the U.S. economy. Jobs data, which
was unexpectedly weak last month, follows on Friday.
The U.S. PMI and payrolls data could signal the economy is
growing fast enough for the Federal Reserve to keep cutting back
its bond-buying programme - a move that could encourage
investors to pull money from emerging markets and to put it into
"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.
The dollar dropped against the Canadian dollar - which many
hedge funds have been betting against - to a one-week low of
Marshall Gittler, head of global FX strategy at IronFX
Global, said the move was driven by money managers rebalancing
the hedges in their portfolio at the end of the month.
"Given the technical nature of the move, I expect it will be
only temporary and this pullback may represent a good
opportunity to establish new short-CAD positions."