(Recasts, updates prices)
By Kevin Plumberg
NEW YORK, Feb 6 (Reuters) - The euro drifted lower on
Wednesday, with investors expecting the European Central Bank's
vigilant stance on inflation to give way to concerns about
economic growth following a decision on interest rates on
Thursday.
The ECB is expected to keep the benchmark euro zone
interest rate at 4 percent -- a full percentage point above the
U.S. federal funds rate -- leaving the focus on whether the
central bank's president, Jean-Claude Trichet, will stick to
his hawkish stance amid signs of slowing growth in Europe.
Currency strategists at BNP Paribas doubt the ECB will be
able to maintain a vigilant stance on inflation.
"Even if it does, the euro is unlikely to benefit since
European growth seems to be in free fall, suggesting an overly
tight monetary policy could hit the ECB's credibility," the
group's foreign exchange strategists wrote in a note to
clients.
"We see the euro trading lower against the dollar, the yen,
the Swiss franc and the pound."
By late afternoon in New York, the euro was trading down
0.1 percent from late Tuesday at $1.4620 <EUR=>, near the
middle of a $1.4966-to-$1.4308 range that the currency has
remained in since mid-November.
The euro was down 0.4 percent at 155.67 yen <EURJPY=>.
Against the Swiss franc, the euro slipped 0.4 percent to 1.6045
francs <EURCHF=>.
The dollar was down 0.3 percent at 106.45 yen <JPY=>,
weighed by a late-session decline in U.S. stock indexes.
Futures markets already reflect expectations that the ECB
will cut rates by a half percentage point by the third quarter
<FEIU8>, but are split on chances of a further quarter-point
easing by year end.
The Bank of England will also be meeting on Thursday as
well. Investors are expecting UK interest rates to be cut to
5.25 percent from 5.5 percent.
"Less-than-favorable data indicating slowing growth in both
regions suggests central bankers will take a more dovish stance
at tomorrow's announcement," Evan Mahoney, an analyst with
Wells Fargo Bank, said in a note.
EURO BULLS BEWARE
Investors had earlier bought the yen as Asian stocks posted
their biggest loss in two weeks on worries about the health of
the global economy, dampening investors' appetite for riskier
assets. In such an environment, investors who have borrowed the
Japanese currency to fund purchases of higher-yielding assets
-- in what are known as carry trades -- tend to buy the yen
back to reduce risk and cover their positions.
U.S. stocks struggled throughout Wednesday's session, then
finally went into the red late in the afternoon, pushing up the
yen.
"There's been some discussion about carry trades in this
environment, and the yen gains are consistent with higher risk
aversion," said Camilla Sutton, currency analyst at Scotia
Capital in Toronto.
Worries about the global economic outlook were stoked on
Tuesday by a sharp fall in the Institute for Supply
Management's non-manufacturing index, a gauge of the vast U.S.
service sector, which posted its biggest monthly decline on
record.
There were also signs that the slowdown will not be limited
to the United States. Euro zone retail sales fell in December
despite Christmas shopping, while growth in the bloc's service
sector slowed almost to a standstill in January.
Reports such as these have fed speculation that the euro
has yet to weaken the way that the dollar did last year when
the credit crisis began to imperil the U.S. economy.
Indeed, analysts at Citigroup who focus on currency flows
among the bank's clients said that institutional investors,
which usually make medium- to longer-term bets, over the last
five weeks have been unwinding their bets on euro strength that
helped push the single currency to record highs late last
year.
"We warn that the EUR/USD rally may now be over," CitiFX
Flows analysts said in a note.
(Editing by Jonathan Oatis)
