(Adds comments, details, recasts)
By Vivianne Rodrigues
NEW YORK, Feb 5 (Reuters) - The euro fell against the
dollar and the yen on Tuesday after weak euro zone service
sector data fed expectations that the European Central Bank
might have to cut interest rates to shore up growth.
In the United States, the dollar erased early gains against
the yen after a report showed a sharp drop in activity in the
service sector in January. The weak data reignited fears that
the economy is slowing down despite a series of recent rate
cuts by the Federal Reserve aimed at reviving 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. For
details, see [].
A separate report later showed euro-zone retail sales
defied expectations of a monthly rise in December and fell,
underscoring a slowing economy.
"The more weak data comes out of Europe, the more clear it
becomes that they are not insulated from a global slowdown and
the more the euro becomes susceptible to weakness," said Brian
Taylor, head currency trader at M&T Bank in Buffalo, New York.
"The euro may be trading back at 1.45 to the dollar really
soon."
In midmorning trading in New York, the euro was down about
1.2 percent at $1.4648 <EUR=>, 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
U.S. currency's value against a basket of six currencies, was
up 0.9 percent at 76.08 <.DXY>, moving further away from the
two-month lows struck last week.
The sharp drop in European data "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.
The ECB meets to set interest rates on Thursday and is
still expected to keep them on hold at 4 percent.
Against the yen, the dollar traded little changed on the
day at 106.85 yen <JPY=>, after climbing earlier to as high as
107.74. The greenback gave up almost all its gains after the
dismal showing in the Institute for Supply Management's
non-manufacturing index. The index plummeted in January to
levels not seen since the 2001 recession. []
"An absolutely stunning ISM non-manufacturing number," said
Alan Ruskin, chief international strategist at RBS Greenwich
Capital. That's "heartwarming only for those who think the
economy is already in a recession. The data is extremely
dollar-negative, although the inability to sustain dollar
losses last week will keep the market skittish and
follow-through will be restrained."
AGGRESSIVE STANCE
The Fed's aggressive rate cuts in recent months lent some
dollar support as investors took the view the bold action would
support the U.S. economy and fuel a recovery later in the
year.
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-percentage-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
percentage point to 5.25 percent. This would be its second rate
cut in three months.
Still, Australia's dollar dropped even as benchmark
borrowing costs rose to an 11-year high of 7 percent. The
Aussie dollar initially pared losses but succumbed to the U.S.
dollar's broad strength and last traded down 1.3 percent at
$0.8965 <AUD=>.
(Additional reporting by Nick Olivari and Steven C. Johnson in
New York; Editing by Jonathan Oatis)
