(Updates prices, adds comment, changes byline)
By Ian Chua
LONDON, Feb 5 (Reuters) - The euro slid on Tuesday after
surprisingly weak euro zone service sector data fuelled
expectations that the European Central Bank might have to bring
forward any interest rates cuts to shore up growth.
The euro fell more than 1 percent on the day against the
dollar after figures showed service sector growth across the
15-nation bloc slowed in January to its most sluggish in 4-1/2
years. Germany, Spain and Italy registered contractions. See
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"The sharp drop in PMI played straight into the hands of the
euro bears, supporting their argument that the ECB will not be
able to remain hawkish much longer and will have to follow the
Fed by lowering rates relatively soon," said Boris Schlossberg,
chief currency strategist for DailyFX.com.
A separate report later showed Euro zone retail sales defied
expectations of a monthly rise in December and fell, underscoring a slowing economy.
The ECB meets to set interest rates on Thursday, and is
widely expected to keep them on hold at 4 percent.
"In the past couple of weeks, we've seen euro/dollar run up
to try to test new highs. But last Friday, euro/dollar moved
lower even though we got a weak U.S. non-farm payrolls number,"
said Adarsh Sinha, analyst at Barclays Capital.
"That in itself suggests the bullish euro sentiment against
the dollar, or positions, were probably too extreme, which is
why we saw the reversal on Friday and which is why we're seeing
a fairly large follow-through following weak economic data in
the euro area."
At 1200 GMT the euro was down 1.1 percent at a near 1-1/2
week low of $1.4667 <EUR=>, well on track for its steepest
one-day fall in two weeks.
The euro's weakness against the dollar helped lift the
greenback across the board. The dollar index, a measure of the
greenback's value against a basket of six currencies, was up 0.9
percent at 76.028 <.DXY>, moving further away from the two-month
lows struck last week.
CENTRAL BANK STANCES
Against the Japanese yen, the dollar climbed 0.9 percent on
the day to 107.65 yen <JPY=>, on track for its biggest one-day
rise in over six weeks and moving further away from a three-year
low of 104.95 yen struck in January.
The euro's slide pulled major currencies out of the narrow
ranges they were stuck in overnight and added to the dollar's
resiliency.
The Federal Reserve's aggressive rate cuts in recent months
are lending the dollar support as investors take the view the
bold action will support the U.S. economy -- perhaps keeping it
from recession -- and fuel a recovery later in the year.
This contrasts starkly with the ECB's stance so far.
"The Fed's action is allowing the optimists to paint a
better picture, certainly for the second half of the year," said
Derek Halpenny, senior currency economist at BTM-UFJ in London.
"Given the fact they've acted and given that the U.S.
futures strip has discounted additional easing, it's fair to say
there's a lot of bad news priced into the dollar already."
The Fed has already slashed rates by 225 basis points and is
seen cutting at least another 75 by the end of the year. Futures
markets expect the ECB to cut rates by 50 basis points by the
third quarter and are split on a further quarter point easing
before the end of the year.
The Bank of England also meets to set rates on Thursday, and
is expected to cut borrowing costs a quarter of a point to 5.25
percent. This would be its second rate cut in three months.
The Reserve Bank of Australia, meanwhile, headed down the
opposite path on Tuesday, hiking rates to an 11-year high of 7
percent and suggested more tightening may be needed.
The Aussie dollar initially pared losses but succumbed to
the U.S. dollar's broad strength in the London session, last
trading down 0.6 percent at $0.9032 <AUD=>.
(Reporting by Jamie McGeever and Ian Chua; editing by David
Christian-Edwards)
