Euro hits 2-week lows; inflation sparks ECB rate speculation

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The euro fell to a two-week low against the dollar on Friday, extending losses to a fifth day as slowing euro zone inflation led some in the market to forecast a near-term European Central Bank rate cut.

A cut would hurt the euro's rate advantage over other major currencies. The euro's weakness was broad-based; it hit a near three-week low against the yen and a two-week trough against sterling.

Its losses triggered fresh demand to hedge against further weakness with one-month euro/dollar implied volatilities hitting their highest in three weeks at 7.2 percent.


The euro fell to $1.35, its lowest since Oct. 16, and last down 0.6 percent on the day. Its fall accelerated after data on Thursday showed euro zone inflation fell to a four-year low of 0.7 percent in October, way under the ECB's target of just below 2 percent.

The currency is now flirting with important chart supports around $1.3550, including a level representing the 76.4 percent retracement of its Oct 16-25 rally and a 38.2 percent retracement of its rally since Sept.

The common currency also lost ground against other currencies including the yen, hitting a two-week low of 132.985 yen. Renewed pressure on the euro saw the dollar index rising to a two-week high of 80.42, pulling further away from a nine-month trough of 78.998 plumbed a week earlier.

The dollar, however, was flat against the yen above 98 yen to be off this week's peak of 98.69, largely in a knee-jerk risk-off reaction to fall in U.S. and Japanese shares.

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