FOREX-Euro on pace for worst week in 16 months on ECB speculation

Reuters

* 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

By Wanfeng Zhou

NEW YORK, Nov 1 (Reuters) - The euro fell for a fifth dayagainst the dollar on Friday, heading for its biggest weeklyloss in 16 months, on growing expectations the European CentralBank will ease monetary policy further to protect growth.

More losses are likely as traders said the single currency'sclimb in recent months was overdone. The euro hit a 23-monthhigh above $1.38 last Friday, a gain of more than 8 percent fromearly July.

Plunging euro zone inflation is raising the specter ofdeflation in some areas and fueling bets the ECB will be forcedto ease monetary policy in coming months. A rate cut would erodethe euro's interest rate advantage over other major currencies.

"Speculation that the central bank may cut rates next weekhas led to the euro bearing the brunt of the greenback'snew-found resilience," said Samarjit Shankar, director of marketstrategy at BNY Mellon in Boston.

The euro fell as low as $1.3478, according to Reutersdata, its lowest since Oct. 16. It was last down 0.7 percent at$1.3488 after having fallen 1.1 percent on Thursday, its biggestone-day drop in more than six months.

Near-term support lies around $1.3480 heading into the ECBmeeting. Below that level, some traders said the euro couldpotentially fall towards $1.3250 or even $1.30.

The euro at current levels is poised to end the week 2.3percent lower, the largest weekly loss since early July.

The ECB meets next Thursday. Money markets, which werealready pricing in the possibility of looser ECB policy in thecoming year, now reflect an outside chance of a move in the nextfew months.

Vassili Serebriakov, foreign exchange strategist at BNPParibas in New York, said while his firm is not expecting an ECBrate cut at its November meeting, it is forecasting one at theDecember meeting. BNP sees the euro at $1.32 at year end.

The euro's losing streak against the greenback marked itslongest stretch in two months. It also fell 0.3 percent to133.19 yen but gained 0.1 percent versus sterling, which came under pressure after disappointing UKmanufacturing data.

The dollar rose 0.4 percent to 98.76 yen and was ontrack for a weekly gain of 1.4 percent, the best weeklyperformance since mid-July.

The dollar index, which measures the greenback against abasket of six major currencies, rose 0.7 percent to its highestsince mid-September at 80.729, far above a nine-monthtrough 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 aphrase from its September meeting that noted tight financialconditions.

Investors should expect more dollar buying and euro selling,said Richard Cochinos, G10 strategist at CitiFX, a division ofCitigroup in New York.

"As the growth story in Europe changes, the equity flowinvestment that has been supporting euro/dollar should fall,"Cochinos said. "When you look at equity positions, they are justbeginning the rebalancing."

Adding to dollar strength was data showing U.S.manufacturing sector expanded at its fastest pace in years inOctober despite a partial government shutdown during the firsthalf of the month.

St. Louis Federal Reserve Bank President James Bullard saidon Friday the Fed should wait for signs that U.S. inflation isheading higher before starting to scale back its massivebond-buying program.

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