FOREX-Euro languishes near 5-week low vs dollar, sterling eyes BoE

Reuters

* Euro drifts near 5-week low vs USD, 16-month low on sterling

* WSJ report says Bundesbank willing to back ECB easing next month if needed

* Sterling awaits BoE report and UK jobs data (Updates levels, adds comments)

By Ian Chua and Masayuki Kitano

SYDNEY/SINGAPORE, May 14 (Reuters) - The euro languished near five-week lows against the dollar on Wednesday, having come under renewed pressure as markets grow more convinced the European Central Bank will ease policy next month.

The euro inched up 0.1 percent to about $1.3715, staying within sight of Tuesday's low near $1.3688. A break below the April 4 trough of $1.3672 would take it back to levels not seen since late February.

It has slid roughly 2 percent since Thursday when ECB President Mario Draghi said the bank was ready to take action next month to boost the euro zone economy if updated inflation forecasts merit it.

The euro's latest decline was sparked by a report in the Wall Street Journal that said the Bundesbank was willing to back an array of stimulus measures from the ECB next month, including a negative rate on bank deposits and purchases of packaged bank loans if needed to keep inflation from staying too low.

"Euro will remain offered on rallies into the June meeting," said Jeffrey Halley, FX trader for Saxo Capital Markets in Singapore, referring to the ECB's policy meeting next month.

"It has become the carry trade funding currency of choice, which has added to the selling pressure," he added.

In carry trades, investors sell low-yielding currencies such as the euro to fund their investment in higher-yielding currencies and assets.

Halley added that the euro could head back toward the top of its recent range if the ECB holds off from any additional monetary stimulus in June.

Against the Australian dollar, the euro touched a near six-month low of A$1.4589. Versus sterling, the euro stood near 81.41 pence, struggling to pull away from Tuesday's 16-month low of 81.35 pence.

"The euro's fading resilience since last week's ECB meeting suggests the currency should remain vulnerable to softer data including today's March eurozone industrial output where our economists expect a 0.2 percent decline," analysts at BNP Paribas wrote in a note to clients.

Traders said the near-term outlook for sterling hinges on the Bank of England inflation report and UK employment data due later in the day. Both could potentially provide fresh signals on the timing of an expected rise in UK interest rates.

JPMorgan analysts said they were expecting the BOE report to provide some confirmation of market expectations for gradual tightening beginning early next year, "although this should be tempered by a BOE very much comfortable with the absence of inflation pressures."

The recent pressure against the euro has helped support the dollar versus a basket of major currencies. The dollar index last stood at 80.046, having scaled a five-week high of 80.180 on Tuesday. Against the yen, the dollar eased 0.1 percent to 102.17 yen.

(Editing by Jacqueline Wong)

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