November 1, 2013 / 4:26 PM / 4 years ago

FOREX-Euro falls to 2-week low, on pace for worst week in 16 months

* Euro falls for fifth day as inflation data fuels ECB rate cut talk

* Euro on pace for worst weekly loss since July 2012

* Dollar index hits highest since mid-September

* Dollar buoyed by strong U.S. manufacturing activity data

By Julie Haviv

NEW YORK, Nov 1 (Reuters) - The euro fell to a two-week low against the dollar on Friday, extending losses to a fifth day as slowing euro zone inflation raised expectations of a European Central Bank rate cut by the end of the year.

With a rate cut seen eroding the euro’s interest rate advantage over other major currencies, the currency was on track to notch its biggest weekly loss against the dollar since the week ended July 6, 2012.

The euro’s losing streak against the greenback also marked its longest stretch in two months, but its weakness was broad-based as it also fell sharply against the yen sterling.

On Thursday data showed inflation falling to a four-year low of 0.7 percent in October, way under the ECB’s target of just below 2 percent.

Tumbling euro zone inflation has firmed up market expectations that the ECB will be forced to ease monetary policy in the coming months, which has taken the shine off a resurgent euro.

Money markets, which were already pricing in the possibility of looser ECB policy in the coming year, now reflect an outside chance of a move in the next few months.

“We have seen a lot of selling pressure on the euro; some of it was month-end related (positioning) and some of it was related to expectations of an ECB rate cut,” said Vassili Serebriakov, foreign exchange strategist at BNP Paribas in New York.

Serebriakov said while BNP Paribas is not expecting an ECB rate cut at its November meeting, it is forecasting one at the December meeting.

“When the euro reached $1.38 last month it felt overbought,” he said. “Yesterday we adjusted our year-end forecast for the euro to $1.32”.

The euro fell as low as $1.3478 in late-morning New York trade, its lowest since Oct. 16. It was last down 0.7 percent at $1.3484 after having fallen 1.1 percent on Thursday, its biggest one-day drop in more than six months.

The euro at current levels is poised to end the week 2.3 percent lower, but it remains higher on the year, up 2.2 percent.

The dollar index, which measures the greenback against a basket of six major currencies but is dominated by the euro, rose 0.7 percent to its highest since mid-September at 80.767 , far above a nine-month trough of 78.998 plumbed a week earlier.

“Investors will probably not establish large dollar long positions, but given this week’s FOMC (Federal Open Market Committee) meeting and data uncertainty they can no longer be as underweight,” said Richard Cochinos, G10 strategist at CitiFX, a division of Citigroup in New York.

The FOMC, the Federal Reserve’s policy-making arm, was seen as less dovish than expected when it met this week. The Fed dropped a phrase from its September meeting noting tight financial conditions.

“As the growth story in Europe changes, the equity flow investment that has been supporting euro/dollar should fall,” Cochinos said. “When you look at equity positions they are just beginning the rebalancing.”

“Expect more dollar buying and euro selling,” he said.

St. Louis Federal Reserve Bank President James Bullard said on Friday the Fed should wait for signs that U.S. inflation is heading higher before starting to scale back its massive bond-buying program.

Strong data also favored the dollar. Manufacturing expanded around the world in October, with business surveys on Friday showing U.S. factory output growing at its fastest pace in 2-1/2 years and Asian manufacturers reporting the fastest upturn in months, led by China.

Against the yen, the dollar reached a two-week high at 98.84 yen and last traded up 0.4 percent at 98.74, according to Reuters data.

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