By Eric Burroughs
TOKYO, Feb 7 (Reuters) - The dollar edged up against the euro
on Thursday, with market players awaiting a European Central Bank
policy decision later in the day for clues to whether the ECB is
softening its inflation-fighting stance.
Investors are eyeing the possibility of two ECB rate cuts
this year after weak figures on service sector activity in the
euro zone earlier this week stoked expectations that the central
bank will have to shift gears on policy.
So far most ECB officials have repeated their worries about
inflation. Analysts expect ECB President Jean-Claude Trichet to
resist pressure for any change in its policy stance. Two weeks
ago Trichet said a rate cut was not needed to help buttress
growth. []
The dollar has bounced back against major currencies this
week as investors increasingly believe the ECB will have to
follow the BoE and Federal Reserve in cutting rates, which would
eat away at the euro's yield advantage over the U.S. currency.
Koji Fukaya, senior currency strategist at Deutsche Bank,
said any cautious comments on the growth outlook from Trichet
could give a boost to stocks while hurting the euro slightly.
"Market participants, especially on the equities side, are
hoping for dovish comments," Fukaya said.
Fukaya said any euro fall against the dollar on dovish
Trichet remarks would be limited if stocks react positively,
giving the single currency a boost against the yen.
The euro dipped 0.1 percent to $1.4617 <EUR=> from late U.S.
trade, having pulled back from a high of $1.4956 struck on Friday
last week that came just short of the single currency's all-time
peak.
The dollar was flat on the day at 106.50 yen <JPY=>, while
the euro fell 0.2 percent to 155.65 yen <EURJPY=R>.
The yen gained against the Australian dollar as some market
players cut back on carry trades, in which funds are borrowed in
low-yielding currencies like the yen to buy higher-yielding
currencies and assets, before this weekend's Group of Seven
gathering of finance officials in Tokyo.
The Australian dollar was down 0.4 percent at 95.01 yen
<AUDJPY=R>.
Analysts do not expect the G7 to change its language on
currencies calling for greater currency flexibility from China,
with the focus instead on the U.S. economy's troubles and the
potential global fallout. []
Trading activity was subdued, with many markets across Asia
closed for Lunar New Year holidays.
ECB AND BOE
The ECB has held rates at 4.0 percent since mid-2007, while
the Fed has slashed rates to 3.0 percent from 5.25 percent in the
past five months to counter an economic slowdown and possible
recession.
"We continue to believe the ECB will have to eventually face
up to deteriorating euro zone fundamentals and ease rates,"
currency strategists at UBS said in a note to clients. UBS
forecasts a full percentage point of ECB rate cuts this year.
But analysts believe the Fed is likely to slow the pace of
its hefty rate cuts, which totalled 1.25 percentage points in
January alone, over the course of the year.
The Bank of England also wraps up a policy meeting later in
the day and is widely expected to trim rates by a quarter-point
to 5.25 percent in what would be its second such cut in the past
few months.
Sterling edged down 0.1 percent to $1.9588 <GBP=D4>.
(Additional reporting by Rika Otsuka; Editing by Mike Miller)
