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Euro vulnerable before ECB, hits near 4-week low vs yen

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The euro fell to a near four-week low against the yen on Tuesday, hit by speculation the European Central Bank may signal easier monetary policy or even cut rates this week.

After data last week showing a sharp drop in inflation, some in markets have said the ECB could cut interest rates on Thursday, or at least lay the groundwork for a move.

The euro fell 0.5 percent to 132.395 yen on the EBS trading platform, its lowest since Oct. 10, having dropped below chart support at 132.63 yen, the 55-day moving average.

The euro was down 0.2 percent at $1.3483, just above a seven-week low of $1.3442 set on Monday.

(Read more: Were the euro bulls just too hasty?)

"The bias is for a weaker euro ... The market had got too long of euro/dollar and, given the uncertainty over the ECB, the theme could be some more squaring of short-term positions," said Paul Robson, currency strategist at RBS.

He said a break below chart support at around $1.3445,from a trendline drawn from a low hit in early July, could be a cue for further losses.

The single currency rebounded on Monday as a survey showed euro zone manufacturing activity accelerated in October, but these gains proved short-lived.

However, with the U.S. Federal Reserve seen likely to hold off from tapering its stimulus until next year and expected to keep interest rates low for an extended period, some analysts said risks of a weaker euro could be limited.

The dollar index, which measures the dollar's value against a basket of currencies, was up 0.1 percent at 80.655. It hit a seven-week high of 80.930 on Monday.

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Several U.S. central bankers said on Monday the Fed was in no hurry to taper its bond-buying stimulus.

(Read more: Be patient, the yen trade is not over yet)

Teppei Ino, analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore, said the euro's drop should be seen as a corrective move after many traders had piled up long positions.

"If you ask whether there will be a shift to a trend of dollar strength and euro weakness, I don't think that will be the case."

The dollar fell 0.4 percent to 98.23 yen.

The Australian dollar slipped 0.4 percent to $0.9474 after the Reserve Bank of Australia warned a full economic recovery may not be possible without a weaker currency.

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