* Euro falls to near Friday's 2-1/2 month low
* Shared currency hurt by weak euro zone data
* Growing bets on ECB rate cut this week
By Anooja Debnath
LONDON, March 4 The euro fell on Monday on
growing belief that euro zone economic worries could prompt the
European Central Bank to cut interest rates sooner than
Although a Reuters poll last week showed economists expected
the ECB to keep rates on hold this Thursday, some strategists
said euro weakness would persist on growing expectations bank
chief Mario Draghi would hint at future cuts.
Poor euro zone sentiment and unemployment data since last
week could compel the ECB to revise down its outlook for the
currency bloc's economy and consider earlier rate cuts, they
said. Data on Monday showed euro zone sentiment tumbled in March
on renewed political uncertainty in Italy.
Italy's inconclusive election last week also weighed on the
currency. Analysts are concerned that without a stable
government, the country will be unable to pass reforms required
to get its borrowing and debt under control.
"The ECB will be in defensive mode and they may cut rates
this meeting, while the political uncertainty in Italy is a good
reason to be bearish on the euro, which could tend to trade
lower," said John Hardy, currency strategist at Saxo Bank.
The euro hit a session low of $1.2982, not far from a
2-1/2 month low of $1.2966 struck on Friday, after the euro zone
Sentix data was released. The shared currency was last down 0.2
percent on the day at $1.2995.
Traders said option expiries at $1.3000 could keep the euro
pinned around that level on Monday and any rebound would be
short-lived as the euro would be sold at higher levels.
Stop loss orders are cited below $1.2960 with reported
option barriers at $1.2950, $1.2925 and $1.2900. A break below
$1.2900 could take the euro towards its next support at $1.2850,
its 200-day moving average.
Demand for options betting on euro weakness persists. The
benchmark one-month risk reversal, which measures
the relative demand for put and call options, was dealt at
around 1.35 vols in favour of euro puts - bets that the currency
Citi said it had recommended investors add a three-month
euro put/dollar call option, targeting $1.27.
Overall the outlook for the euro was glum and some analysts
said poor euro zone services Purchasing Managers' Index surveys
on Tuesday and growth data on Wednesday could push the euro even
lower if they fell below forecasts.
"The euro is down on a general risk-off mood ... Draghi
could be more dovish and there could be a rate cut this week. If
not, he could signal something is in the offing," said Jane
Foley, senior currency strategist at Rabobank.
The weak euro zone data contrasted with a jump in U.S.
manufacturing activity and this helped push the dollar to a
six-month high of 82.509 against a basket of currencies
on Friday. It last stood at 82.387, up 0.1 percent on the day.
Broad U.S. spending cuts that automatically kicked in on
Friday and threaten to dampen economic growth have so far not
hurt the U.S currency. In fact, currency speculators' bets in
favour of the more liquid dollar surged in the week ending Feb.
Spreads between two-year U.S. government bonds
over their German counterparts have also moved in
favour of the former, helping the dollar. Investors are
expecting the Federal Reserve to slow its asset purchase
programme later in the year as the U.S. jobs market shows signs
"We're turning bearish euro/dollar," said George Saravelos,
currency strategist at Deutsche Bank. "Even if Fed QE continues
throughout 2013, U.S. two-year yields will turn up this summer
and there's little additional good news that can be priced into
Investors discarded growth-linked currencies such as the
Australian dollar after China announced measures to
tighten curbs on the property market.
The Aussie fell to a near eight-month low of $1.0116 and was
last down 0.7 percent on the day at $1.0140.