* Euro zone inflation at lowest in almost 5 years
* Upbeat U.S. Q2 GDP partly offset by mixed Fed views
* Dollar index set for biggest monthly gain in over a year
* Non-farm payrolls next in focus
By Jemima Kelly
LONDON, July 31 The euro hovered near a
nine-month trough against the dollar on Thursday after data
showed euro zone inflation falling to its lowest since the
height of the financial crisis five years ago.
Consumer prices in the 18 countries sharing the single
currency crept up 0.4 percent on the year in July, down from 0.5
percent in June - uncomfortably close to deflationary territory
and far below the European Central Bank's 2 percent
In stark contrast, data from the United States on Wednesday
indicated its economy is staging a robust recovery, with growth
in the second quarter rebounding sharply from a weak start to
the year and inflation moving closer to the Federal Reserve's
The weak euro zone figures will keep pressure on the ECB to
loosen monetary policy further, though some analysts said the
central bank would wait to see the effects of its latest round
of measures, including a negative deposit rate and cheap
long-term loans to banks, before announcing anything further.
"The ECB has set out the course of policy fairly clearly
from here and the hurdle for moving it is higher than the 0.1
undershoot on a single month's inflation data," said Adam Cole,
head of currency strategy at RBC Capital Markets.
Analysts said the market had largely priced in the fall in
inflation, though it was slightly sharper than the 0.5 percent
expected by economists in a Reuters poll.
The euro edged down to $1.3386, rooted close to the
nine-month low of $1.3368 hit on Wednesday.
The dollar held just below a 10-month high against a basket
of currencies after the Federal Reserve said it was in no
rush to raise interest rates, tempering a rally that dates back
to early May.
Adam Myers, head of currency strategy at Credit Agricole in
London, said the dollar still looked strong but that gains,
particularly against the euro, may be almost over for now. The
dollar index is up more than 2 percent so far this month, on
track for its biggest monthly gain in more than a year. It
traded at 81.478, just off Wednesday's high of 81.545.
"The market is now a little bit too far ahead of itself -
there's not going to be any Fed interest rate rises in the first
half of 2015 and that's what the market is pretty much pricing
in at the moment," he said. "It will only take a weak payrolls
number and we'll see quite a snapback."
Data due on Friday is expected to show that U.S. employers
added 233,000 new non-farm jobs in July.
The Australian dollar hit an eight-week low against the
dollar, extending losses for a number of higher-yielding
currencies. The Aussie fell to $0.9287 before
recovering slightly to $0.9296, down 0.4 percent on the day,
making it the worst performer among developed world currencies
after mixed data on Friday.
Sterling was weakened by soft house price and consumer
confidence data, as well as comments from Bank of England Deputy
Governor Ben Broadbent, who said it was "quite possible" the
currency was overvalued by as much as 10 percent.
The pound hit a seven-week low against the dollar of $1.6871
in European morning trade and was poised for its
biggest monthly loss in over a year against the greenback.
Against the yen, the dollar climbed to a four-month high of
103.15, before steadying at 102.825. It was poised to
gain about 1.4 percent on the month against the yen.
(Reporting By Jemima Kelly; Editing by Larry King and Toby