February 14, 2013 / 5:35 PM / 5 years ago

FOREX-Euro tumbles as dismal data spurs talk of ECB rate cut

* Euro zone economy contracted more than expected
    * Investors look to G20 meeting for 'currency war' talk
    * G20 FX text may differ from G7, but same intent -Russia
    * Easing euro zone money market rates could weigh on euro

    By Julie Haviv
    NEW YORK, Feb 14 (Reuters) - The euro plunged to a
three-week low against the dollar and sank against the yen on
Thursday after data showed a dour picture of the euro zone
economy, raising speculation the European Central Bank will cut
interest rates.
    The yen came off recent multi-year lows against the dollar
as investors remained cautious a day ahead of a meeting of Group
of 20 finance officials where exchange rates are expected to be
an important topic, with a particular focus on the yen's recent
    The euro fell for the first time in four sessions against
the dollar after the European Union reported that the euro
zone's economy shrunk by 0.6 percent in the last three months of
2012, a steeper decline than the 0.4 percent drop forecast in a
Reuters poll. 
    The economies of German and France, the two largest
economies of the 17-nation euro zone, also shrank by more than
expected in the final quarter, casting doubt on forecasts of a
recovery in early 2013. 
    "The data raised concerns that the ECB may turn more dovish
than they are, and there is still a risk that (they) could lower
rates," said Camilla Sutton, chief currency strategist at
Scotiabank in Toronto.  
    "It is surprising how confident ECB President Mario Draghi
was at the December monetary policy meeting, which has helped
lift the euro, but I think we got ahead of ourselves thinking
everything is fine in the euro zone," she said. 
    The euro last traded at $1.3328, down 0.9 percent,
after earlier hitting a three-week low of $1.3313. The euro had
hit a one-week high of $1.3520 on Wednesday and a 15-month high
of $1.3711 on Feb. 1.
    Against the yen, the euro last traded at 124.08,
down 1.2 percent on the day, but above the session low of 123.79
    The odds of an ECB rate cut this year grew wider, according
to Joe Manimbo, senior market analyst at Western Union Business
Solutions in Washington, D.C.     
    "Negatives have been on the rise in the euro zone ... in
addition to fresh economic jitters, investors are wary ahead of
Italy's national elections set for Feb. 24-25," he said.
    Euro zone banks' next repayment of emergency loans to the
European Central Bank later this month could also weigh on the
    The euro is up around 1 percent against the dollar and about
8.4 percent against the yen this year, largely a result of an
improved appetite for risk and differing global central bank
    G20 IN FOCUS
    The Group of Seven nations said this week that fiscal and
monetary policies must be directed at domestic economies and not
at targeting exchange rates.
    But confusion reigned after a G7 official said the statement
was aimed at Tokyo, a comment that prompted the yen to surge on
a volatile foreign exchange market. Other G7 countries later
said it should be taken at face value. 
    Hosts Russia said the G20 meeting in Moscow would back the
thrust of a Group of Seven statement on currencies, but
indicated there was still haggling over the final wording. 
    The International Monetary Fund on Thursday said the talk
about currency wars was overdone, playing down concerns that
easy monetary policies in advanced economies had sparked
dangerous devaluations. 
    Against the yen, the dollar, was down 0.3 percent at
93.08, well below a 33-month high of 94.42 hit on Monday,
according to Reuters data. 
    The dollar briefly reacted to U.S. data showing the number
of Americans filing new claims for unemployment benefits fell
more than expected last week. 
    Earlier, the Bank of Japan kept policy steady as expected
and revised up its assessment of the Japanese economy. Some
believe the bank may hold off on expanding stimulus next month
and wait until its first rate review under a new governor,
scheduled for April 3-4. 
    "With Japan seemingly ground zero of any so-called currency
war, backlash could be headed Tokyo's way at this weekend's G-20
summit," said Western Union Business Solutions' Manimbo. 
    Although yen selling may be poised for a short term
reprieve, a bearish trend still appears intact over the medium
term and beyond," he said.

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