FOREX-Euro buckles as pressure mounts on ECB to ease

Reuters

* Euro wallows at two-week lows after sharp drop overnight

* Unexpected slowdown in inflation adds to pressure on ECBto do more

* China PMI data next in focus, U.S. ISM to follow

By Ian Chua

SYDNEY, Nov 1 (Reuters) - The euro nursed heavy losses earlyin Asia on Friday, having suffered its biggest one-day drop inover six months as a shock slowdown in inflation piled pressureon the European Central Bank to further stimulate the economy.

Data on Thursday showed inflation dropped to a four-year lowof 0.7 percent in the euro area in October, way under the ECB'starget of just below 2 percent. Other data showed unemploymentheld at record highs in September, and included alarmingrevisions to previous months.

The euro huddled at $1.3585 on Friday, having slidmore than 1 percent to a two-week trough around $1.3515overnight. It was now down 1.8 percent from a two-year peak of$1.3833 set just a week ago.

Immediate support was seen at $1.3557, a level representingthe 76.4 percent retracement of its Oct 16-25 rally.

"The euro zone's consumer price report highlighted a growingthreat for deflation," said David Song, currency analyst atDailyFX.

"Indeed, there's growing bets that the ECB will implement arate cut or announce another long-term refinancing operating asit struggles to achieve the 2 percent target for inflation."

But traders warned about getting too carried away, notingthe always cautious ECB could simply choose to maintain aneasing bias as it continues to see a sustainable recovery in theeuro zone.

The common currency also lost ground against othercurrencies including the yen and Australian dollar, falling 1.3percent to 133.55 yen and shedding 0.8 percent toA$1.4329.

Renewed pressure on the euro saw the dollar index jump 0.7percent to a two-week high of 80.273, pulling furtheraway from a nine-month trough of 78.998 plumbed a week earlier.It last traded at 80.253.

The dollar, however, eased against the yen, dipping to 98.36 to be off this week's peak of 98.69.

In contrast to the euro zone, U.S. data was far moreencouraging. Business activity in the U.S. Midwest surged pastexpectations in October as new orders hit their highest levelsince 2004, while weekly unemployment claims fell, counteringrecent evidence of soft economic growth.

The upbeat data only served to keep alive some expectationsthe Fed might scale back stimulus at its December meeting,though most analysts still tip March as the window for a move.

The strong Chicago survey has fuelled speculation thenational ISM survey of manufacturing, due later Friday, couldalso surprise to the upside.

In Asia, hopes are high that China's manufacturing activitypicked up pace in October, adding to signs of stabilisation inthe world's second biggest economy.

The official PMI is due around 0100 GMT, followed by HSBC'sfinal PMI report 45 minutes later.

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