* Euro on track for biggest one-day drop since April 17
* Euro-zone inflation at four-year low, unemployment high
* Dollar up for fifth day, extends gains on day after Fed statement
By Wanfeng Zhou
NEW YORK, Oct 31 (Reuters) - The euro was headed for its biggest one-day drop against the dollar in more than six months on Thursday as a sharp decline in euro-zone inflation and record high unemployment stoked speculation that the European Central Bank may ease further.
Weakness in the euro helped buoy the dollar to a two-week high against a basket of currencies. The dollar also gained after the Federal Reserve on Wednesday dropped a reference to tightening financial conditions in its post-meeting statement.
Euro-zone inflation fell to nearly four-year lows in October and unemployment was stuck at record highs in September, increasing pressure on the ECB to do more to encourage economic recovery. The ECB meets next Thursday.
“The euro is slumping today and for good reasons. Inflation is falling, the economy is slowing down, the unemployment rate is over 12 percent, and all signals now point to an ECB that will turn from hawk to dove,” said Jonathan Lewis, lead portfolio manager of the Samson STRONG Nations Currency Fund in New York.
The euro fell 1.1 percent to $1.3583, not far from a session low of $1.3582, according to Reuters data. At current prices, it was on track for its biggest daily fall since mid-April.
The euro lost 1.3 percent to 133.53 yen. It also lost 1.1 percent against sterling to 84.67 pence.
The dollar index, which tracks the greenback versus a basket of six currencies, rose 0.6 percent to 80.234, its fifth straight day of gains. Last week, the index hit a nine-month low of 78.998 on Friday.
Traders unwound bearish dollar positions that have reached extended levels after Wednesday’s Fed meeting bolstered views that the U.S. central bank could roll back stimulus sooner than many expected. In recent weeks, investors have pushed back expectations for a tapering of stimulus until March 2014.
“Although the amendments to yesterday’s release didn’t cause as much of a jolt as seen back in September, the statement didn’t provide the ‘uber-doves’ enough ammo, causing some of the weaker U.S. dollar bears to capitulate,” said Scott Smith, market analyst at Cambridge Mercantile Group in Calgary, Alberta.
The Fed shocked financial markets last month by opting not to scale back its bond buying.
In a snapshot of the U.S. economy, an index of business activity in the U.S. Midwest surged past expectations in October, while weekly initial unemployment claims fell, countering recent evidence of soft economic growth.
The dollar could gain further should upcoming data exceed expectations. One of the data highlights next week will be the October nonfarm payrolls report on Nov. 8.
Some analysts also said the euro, which has gained about 7 percent since early July, has lost momentum. The single currency hit a 23-month peak of $1.3832 on Friday. Traders said the euro’s failure to make a sustained break above $1.3800 left it vulnerable to a correction.
Comments from ECB Governing Council member Ewald Nowotny that the central bank would provide more liquidity when cheap long-term loans it made in late 2011 and early 2012 expire also weighed on the single currency.
The dollar last traded down 0.2 percent at 98.32 yen, according to Reuters data.
For the month, the euro climbed 0.4 percent against the dollar, its second straight month of gains.
The dollar, however, rose 0.1 percent versus the yen, its third consecutive monthly advance.