Downbeat ECB knocks wind out of euro bulls

SYDNEY Fri Dec 7, 2012 4:19am IST

Euro coins are seen in this photo illustration taken in Budapest January 6, 2012. REUTERS/Bernadett Szabo

Euro coins are seen in this photo illustration taken in Budapest January 6, 2012.

Credit: Reuters/Bernadett Szabo

SYDNEY (Reuters) - The euro languished at one-week lows against the greenback on Friday, having suffered a major setback after the European Central Bank painted a bleak outlook for the euro zone and discussed cutting interest rates.

The single currency fell nearly 1 percent to $1.2950, posting its biggest one-day loss in a month and retreating from a seven-week peak of $1.3127 set mid-week.

"The main trigger for the sharply negative euro reaction was the mention of a 'wide' discussion over rate cuts, while Mr. Draghi also said the ECB was 'operationally ready' for negative rates," said BNP Paribas strategist Vassili Serebriakov.

ECB President Mario Draghi said policy makers talked about cutting its main 0.75 percent policy rate before opting to leave it on hold, even as it slashed forecasts for growth. It also touched on the idea of cutting its deposit rate into negative territory.

The euro was last at $1.2967, with immediate support seen around $1.2949, a level representing the 38.2 percent retracement of its Nov 13-Dec 5 rally.

Against the yen, the euro was also nearly 1 percent lower at 106.81. It suffered losses of more than 1 percent versus the Australian and New Zealand currencies.

The slid in the euro helped push the dollar index .DXY up 0.6 percent to 80.237, rebounding from a six-week trough plumbed mid-week.

Traders said any follow-through euro selling in Asia may be limited ahead of U.S. non-farm payrolls report due 1330 GMT. Analysts polled by Reuters expect a sharp slowdown in employment growth due to the disruption caused by superstorm Sandy.

"We may see the reserve currency consolidate over the next 24-hours of trading as job growth in the world's largest economy is expected to expand at a slower pace," said David Song, currency analyst at DailyFX.

Any weakness in the closely watched report would also reinforce expectations that the Federal Reserve will announce a new round of Treasury bond purchases to replace its expiring Operation Twist program at next week's meeting.

Such action could keep investors from getting too enthusiastic about the greenback.

Meanwhile, the Australian dollar showed little sign of backing down after a surprisingly firm employment report on Thursday prompted markets to trim chances of an interest rate cut at the Reserve Bank of Australia's next meeting in February.

The Aussie reached $1.0515, a high not seen since September, before profit-taking took it down a notch to $1.0478. It's resilience is remarkable given this week's interest rate cut and a slew of data pointing to a less rosy outlook for the local economy.

Trade data due at 0030 GMT will probably support the view of slower growth, with analysts expecting a wider trade deficit of A$2.05 billion in October.

(Editing by Wayne Cole)

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