FOREX-Euro heads for worst week in 16 months on ECB bets
* Euro falls for fifth day vs dollar, more losses likely
* Traders speculate about ECB rate cut as inflation plunges
* Dollar index hits highest since mid-September
NEW YORK, Nov 1 (Reuters) - The euro fell for a fifth day against the dollar on Friday, heading for its biggest weekly loss in 16 months, on growing expectations the European Central Bank will ease monetary policy further to protect growth.
More losses are likely as traders said the single currency's climb in recent months was overdone. The euro hit a 23-month high above $1.38 last Friday, a gain of more than 8 percent from early July.
Plunging euro zone inflation is raising the specter of deflation in some areas and fueling bets the ECB will be forced to ease monetary policy in coming months. A rate cut will erode the euro's interest rate advantage over other major currencies.
"Speculation that the central bank may cut rates next week has led to the euro bearing the brunt of the greenback's new-found resilience," said Samarjit Shankar, director of market strategy at BNY Mellon in Boston.
The euro fell as low as $1.3478, according to Reuters data, its lowest since Oct. 16. It was last down 0.7 percent at $1.3491 after having fallen 1.1 percent on Thursday, its biggest one-day drop in more than six months.
Near-term support lies around $1.3480 heading into the ECB meeting. Below that level, some traders said the euro could potentially fall towards $1.3250 or even $1.30.
The euro at current levels is poised to end the week 2.3 percent lower, the largest weekly loss since early July.
The ECB meets next Thursday. Money markets, which were already pricing in the possibility of looser ECB policy in the coming year, now reflect an outside chance of a move in the next few months.
Vassili Serebriakov, foreign exchange strategist at BNP Paribas in New York, said while his firm is not expecting an ECB rate cut at its November meeting, it is forecasting one at the December meeting. BNP sees the euro at $1.32 at year end.
The euro's losing streak against the greenback marked its longest stretch in two months. It also fell 0.3 percent to 133.25 yen but gained 0.2 percent versus sterling , which came under pressure after disappointing UK manufacturing data.
The dollar rose 0.4 percent to 98.78 yen and was on track for a weekly gain of 1.4 percent, the best weekly performance since mid-July.
The dollar index, which measures the greenback against a basket of six major currencies, rose 0.7 percent to its highest since mid-September at 80.728, far above a nine-month trough of 78.998 plumbed a week earlier.
The dollar rallied after the Federal Open Market Committee, the Federal Reserve's policy-making arm, on Wednesday dropped a phrase from its September meeting noting tight financial conditions.
Richard Cochinos, G10 strategist at CitiFX, a division of Citigroup in New York, said investors should expect more dollar buying and euro selling.
"As the growth story in Europe changes, the equity flow investment that has been supporting euro/dollar should fall," Cochinos said. "When you look at equity positions they are just beginning the rebalancing."
Adding to dollar strength was data showing U.S. manufacturing sector expanded at its fastest pace in years in October despite a partial government shutdown during the first half of the month.
St. Louis Federal Reserve Bank President James Bullard said on Friday the Fed should wait for signs that U.S. inflation is heading higher before starting to scale back its massive bond-buying program.