Dollar Edges Lower Ahead of ECB Rate Decision

The dollar edged lower against the yen and the euro Wednesday with investors reluctant to place big bets on currencies ahead of a key interest rate decision from the European Central Bank on Thursday.

The ECB is widely seen keeping benchmark euro zone interest rates at 4 percent, leaving the focus on the post-decision news conference by bank President Jean-Claude Trichet.

Futures markets expect the ECB to cut rates by a half percentage point by the third quarter but are split on chances of a further quarter-point easing by year-end.

Currency strategists at BNP Paribas doubt the ECB will stick to its hawkish stance on Thursday amid signs of slowing economic growth in the euro zone.

"Even if it does, the euro is unlikely to benefit since European growth seems to be in free-fall, suggesting an overly tight monetary policy could hit the ECB's credibility," the group's FX strategists wrote in a note. "We see the euro trading lower against the dollar, the yen, the Swiss franc and the pound."

In late morning trading in New York, the euro

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[EUR-TN  Loading...      ()   ] rose against the dollar. The dollar was down versus the yen

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[JPY-TN  Loading...      ()   ]. The euro was little changed against the yen

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Investors had earlier bought the yen as Asian stocks posted their biggest loss in two weeks on worries about the health of the global economy, dampening investors' appetite for riskier assets. In such an environment, investors who have borrowed the Japanese currency to fund purchases of higher-yielding assets tend to buy it back to reduce risk and cover their positions.

But the Japanese currency gave up almost all of its early gains as U.S. stocks rebounded from heavy losses on Tuesday.

"There's been some discussion about carry trades in this environment, and the yen gains are consistent with higher risk aversion," said Camilla Sutton, currency analyst at Scotia Capital in Toronto.

Sutton agreed investors would also avoid building large currency positions ahead of the ECB decision on Thursday.

Worries about the global economic outlook were stoked on Tuesday by a much bigger-than-expected plunge in the U.S. Institute for Supply Management's non-manufacturing index, which posted its biggest monthly decline on record.

There were also signs that the slowdown will not be limited to the United States, as euro zone retail sales fell in December despite Christmas shopping, while growth in the bloc's service sector slowed almost to a standstill in January.

In the United States, fed funds options suggested as of Tuesday that traders have fully priced in a 50 basis points March rate cut and more than a 50 percent chance of a 75 basis points cut, according to the Cleveland Federal Reserve.

Still, Richmond Fed President Jeffrey Lacker said on Wednesday it was not yet certain the U.S. central bank would cut interest rates further.

Adding to downward pressure on the euro were worries that European banks, whose earnings season kicks off this week, will report more losses related to troubles in the U.S. subprime mortgage market and the subsequent credit crunch.