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Rate Cut Talk Sends Euro Sliding; Eyes on G-20

Akio Kon | Bloomberg | Getty Images

The euro suffered its biggest daily decline against the dollar in nearly a year on Wednesday, weakened by talk of a euro zone interest rate cut, while signs of economic malaise in Britain and Canada added to the U.S. currency's appeal.

The yen also slipped against the dollar, with officials at a weekend Group of 20 meeting not expected to scold Japan for a monetary policy that has led to a sharp slide in the currency. A bigger focus for currency traders on Wednesday was monetary policy in Europe after Jens Weidmann, a member of the European Central Bank's governing council, was quoted by the Wall Street Journal saying the central bank could cut rates further if conditions in the euro zone worsen.

(Read More: What the G-20 Need to Talk About This Week)

The euro fell 1.1 percent to $1.3026 after hitting a seven-week high overnight and was on track for its largest one-day slide since June. It fell 0.6 percent to 127.73 yen, moving further away from a three-year high above 131. Support for the euro lies around $1.3020, traders said, while a break could spark a decline toward $1.30 and $1.29.

Lower rates in Europe and tepid growth in other developed economies enhance the appeal of the dollar, especially now that markets think the Federal Reserve may tighten its ultra-loose monetary policy by slowing asset purchases later this year.

"When you dig a little deeper and take a step back, this has all the hallmarks of a dollar rally because it is being directed by interest rate differentials," said Paresh Upadhyaya, head of currency strategy at Pioneer Investments in Boston. "That Weidmann admitted they are looking at a rate cut emphasizes it."

So did data showing weak wage growth and higher unemployment in Britain, which added to concerns about fragile U.K. growth and pushed sterling down 0.8 percent to $1.5238.

The Canadian dollar also tumbled after the Bank of Canada cut its growth forecast and left interest rates unchanged. The U.S. currency rose 0.6 percent to C$1.0261.

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The ECB decided to leave interest rates on hold this month, but President Mario Draghi said the bank would "monitor very closely" all data and stands "ready to act" to help the euro zone climb out of recession.

Euro zone inflation eased in March, while investor sentiment in Germany, the euro zone's largest economy, soured in April.

Ashraf Laidi, chief global strategist at City Index in London, said the sharp market reaction highlights "that the euro's biggest risk factor remains that of a rate cut."

U.S. monetary policy is expected to remain accommodative for some time to come, and near-zero interest rates are unlikely to rise any time soon.

But a tapering of asset purchases would likely nudge Treasury yields higher and reassure investors about growing strength in the U.S. economy.

Recent U.S. economic data, however, has been disappointing, suggesting to some that the Fed may not be as eager to tighten policy now as it was at its last policy meeting.

Data showed employers hired at the slowest pace in nine months in March.

That, along with speculators excessive bets against the yen, may have helped slow the Japanese currency's decline.

The dollar rose 0.5 percent to 98.04 yen but remained well below the four-year high of 99.94 yen reached last week.

Upadhyaya said signs that the Bank of Japan's massive monetary easing would chase money out of the yen and into higher-yielding asset abroad have so far been hard to find.

(Read More: Sliding Yen Could Herald New Asian Currency Crisis: Albert Edwards)

"That may have frustrated yen bears who got pulled in at pretty poor levels" when the yen was nearing 100 per dollar, he said. "But that's really just technical positioning, and I am still negative yen in the medium term."

Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, N.J., said most traders expect the dollar to hit 105 yen by midsummer. Upadhyaya said it would probably take confirmation that the Fed will indeed taper its own asset purchases to accelerate that move. "For dollar/yen to break 100 on a sustainable basis, the Fed has to be part of the equation."

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