LONDON The euro hit a two-month low against the dollar and a near four-week low versus the yen on Thursday, as worries about the euro zone's growth prospects weighed on the currency before an ECB policy decision.
A media report which said that Spain is edging away from asking for aid this year drove speculators, already positioned for further weakness, to sell the single currency aggressively. Earlier this week, Prime Minister Mariano Rajoy said conditions over a potential bailout were still being studied.
The euro slid to a two-month low of $1.27225 against the dollar with traders citing stop-loss sell orders below $1.2720 which could prove magnetic. It was last trading at $1.2740, down 0.4 percent on the day.
The euro also hit a near four-week trough against the yen, dropping to 101.64 yen. The euro's losses saw the dollar index .DXY rise to a two-month high of 81.001.
While the European Central Bank is expected to keep interest rates on hold, some analysts say grim euro zone data, including those from Germany, might prompt it to ease policy before the end of the year.
Comments from ECB President Mario Draghi, who said on Wednesday the bank expected the euro zone economy to remain weak "in the near term," added to investor nervousness. Draghi is due to speak later on Thursday and some investors expect him to lean towards a rate cut.
"The general theme here is that weak growth is weighing on the euro. It will be interesting to see what Draghi says today," said Steven Saywell, global head of FX strategy at BNP Paribas.
"Generally speaking we like the euro lower, especially against the crosses."
The European Commission said on Wednesday the euro zone economy will barely grow next year, forecasting slower growth than governments in the bloc's biggest economies expect.
German exports also slid at their fastest pace since late last year, figures showed on Thursday, adding to evidence that the crisis has begun to inflict a heavy toll on the currency bloc's largest economy.
"There are fewer and fewer ways of expressing a negative view against the euro zone other than going short the euro and that is what we are seeing," said Peter Kinsella, currency strategist at Commerzbank.
"Weak data recently has certainly increased the likelihood of a rate cut later this year. With the downgrade by the EC, it will probably be tough to implement austerity measures in the euro zone."
Investors were slightly encouraged by a Spanish bond auction which indicated reasonably healthy demand, although any rebounds in the euro is seen as a good opportunity to sell.
Spain sold 4.76 billion euros of debt on Thursday, including a new five-year bond and its first longer-term issuance since May 2011. The successful sale followed news that the Greek parliament approved, as expected, austerity measures needed to unlock aid and avert bankruptcy.
Sterling hovered close to a one-month high against a broadly weaker euro and could gain if the Bank of England voted against more monetary stimulus. The decision is expected at 1200 GMT.
The euro fell 0.2 percent to a low of 79.73 pence, just shy of a five-week low of 79.71 pence hit on Wednesday. Sterling was down 0.3 percent against the dollar at $1.5940.
The dollar extended the previous session's gains, as focus quickly shifted from President Barack Obama's re-election to the "fiscal cliff" that threatens to push the U.S. economy into a renewed recession next year.
About $600 billion in government spending cuts and higher taxes will kick in early next year, unless U.S. lawmakers take steps to reduce the deficit.
The dollar has been helped by safe-haven inflows due to uncertainty stemming from the fiscal cliff and those positions could be unwound if a resolution is reached.
"It looks like Obama is likely to legislate away much of the fiscal cliff and I think dollar is likely to weaken," BNP's Saywell said.
The dollar slipped 0.2 percent to 79.85 yen, staying below a six-month high of 80.68 yen set last week.
(Editing by Toby Chopra)
Trending On Reuters
Greece faces a last chance to stay in the euro zone on Tuesday when Prime Minister Alexis Tsipras puts proposals to an emergency euro zone summit after Greek voters resoundingly rejected the austerity terms of a defunct bailout. Full Article | Greece a flashpoint for Europe?
Insight - Car dashboards that act like smart phones raise safety issues Full Article