4 Min Read
* Euro slides as uncertainty about Spanish bailout rises
* ECB keep rates unchanged, but risks of more cuts loom
* U.S. fiscal worries underpin safe-haven flows into dollar
By Anooja Debnath
LONDON, Nov 8 (Reuters) - The euro was near a two-month low against the dollar on Thursday, with investors looking past the European Central Bank's decision to keep policy on hold to the bloc's grim growth prospects.
While the ECB's decision to keep its main interest rate at 0.75 percent was widely expected, some analysts said weak euro zone data, including from Germany, might prompt it to ease policy before year end. That is likely to keep the euro under pressure.
A media report which said Spain is edging away from asking for aid this year also drove speculators, already positioned for further weakness, to sell the shared 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 at $1.2746, down 0.2 percent on the day and steady from before the ECB decision.
The euro also hit a near four-week trough against the yen, dropping to 101.64 yen. The euro's losses helped take the dollar index to a two-month high of 81.001.
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 at 1330 GMT and some 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 Europe'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 rebound in the euro was seen as an opportunity to sell.
STERLING UP AFTER BoE
Sterling rose to a five-week high against a broadly weaker euro after the Bank of England left interest rates and its asset purchase programme unchanged.
The euro fell to a low of 79.69 pence. The pound also rose against the dollar to $1.5999 from $1.5952 before the BoE decision.
The dollar index, which measures its performance against a basket of major currencies, extended the previous day's gains, as investors focussed on the "fiscal cliff" that is threatening to push the U.S. economy into a 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 some of those long 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 the 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.