December 6, 2012 / 5:25 PM / 5 years ago

FOREX-Euro tumbles on ECB rate cut expectations

* ECB holds rates at 0.75 percent, cuts inflation, growth
    * ECB President Draghi says wide discussion on rates
    * Political tension in Italy grows

    By Wanfeng Zhou
    NEW YORK, Dec 6 (Reuters) - The euro was headed for its
sharpest drop against the dollar in a month on Thursday after
comments from the European Central Bank chief and a downgrade to
the region's growth and inflation forecasts boosted expectations
of an interest rate cut.
    Political chaos in Italy drove Italian bond yields higher
and added to losses in the euro. Silvio Berlusconi's People of
Freedom party withdrew its support for Italy's technocrat Prime
Minister Mario Monti on Thursday, setting up a conflict that
could force an early election. 
    ECB President Mario Draghi, speaking at a news conference
after the bank's decision to keep its main interest rate at 0.75
percent, said there was a wide discussion on interest rates but
the consensus was to leave the rates unchanged.
    "That could be the signal that 2013's first ECB monetary
decision could include another cut in interest rates," said Neal
Gilbert, market strategist at GFT in Grand Rapids, Michigan.
    "The underlying reason for euro weakness is still there, and
the ECB's warnings of continued weakness over the next year
could be the catalyst for a continued euro drop."
    Draghi's comments came as the ECB predicted the euro zone
economy would shrink again in 2013 and sharply lowered its
growth and inflation forecasts. It also said risks to growth
remain on the downside. 
    The bank forecast gross domestic product in a range of
falling by 0.9 percent to growing by just 0.3 percent next year,
suggesting contraction is far more likely than not. It predicted
inflation at 1.1 percent to 2.1 percent next year.
    "The combination of the ECB's cooler growth and inflation
forecasts opened the door to a rate cut in the months ahead,"
said Joe Manimbo, senior market analyst at Western Union
Business Solutions in Washington.
    Draghi also said policymakers discussed setting a negative
rate on the ECB's deposit facility in an attempt to encourage
banks not to hoard cash at the ECB but lend it into the real
economy instead.
    The euro fell as low as $1.2960 on Reuters data and
was last down 0.7 percent at $1.2971. At current levels, it was
on track for the biggest daily percentage fall since Nov. 2. 
    The euro lost 0.9 percent to 106.79 yen.
    Italian and Spanish government bond yields rose on tensions
in Italy. A disappointing Spanish bond sale on Wednesday also
weighed as it revived talk of an official bailout request from
the euro zone's fourth-largest economy.
    "Some analysts are predicting Italy could be contracting by
as much as negative 3 percent next year. If that's the case,
then they could become another financing crisis for the euro
zone," said Boris Schlossberg, managing director of FX Strategy
at BK Asset Management in New York.
    Investors are shifting attention to Friday's closely watched
government report on nonfarm payrolls for November.
    Payrolls likely rose only 93,000 last month after advancing
171,000 job in October, according to a Reuters survey of
economists. The unemployment rate is seen holding steady at 7.9
    Some analysts said that while the outlook for the euro zone
remained bleak, euro losses against the dollar could be limited.
    "As we expect the (Federal Reserve) to announce a shift to
outright Treasury purchases next week, the U.S. dollar should
remain soft," said Vassili Serebriakov, currency strategist at
BNP Paribas in New York. The Fed holds its December policy
meeting next week.
    BNP forecasts the euro at $1.33 by the end of the year.
    The dollar slipped 0.2 percent to 82.32 yen, not far
from a near eight-month high of 82.82 hit on Nov. 22.
    Traders expect the yen to remain under pressure on
expectations of further monetary easing by the Bank of Japan
following an election on Dec. 16. 
    The Australian dollar rose to a 2-1/2-month high of
$1.0515, after surprisingly strong Australian jobs data prompted
investors to reduce expectations of further policy easing.
 It was last up 0.3 percent at $1.0490.
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