* Euro on track for biggest one-day drop since April 17
* Euro-zone inflation at four-year low, unemployment high
* Dollar up for fifth day, extends gains on day after Fedstatement
By Wanfeng Zhou
NEW YORK, Oct 31 (Reuters) - The euro was headed for itsbiggest one-day drop against the dollar in more than six monthson Thursday as a sharp decline in euro-zone inflation and recordhigh unemployment stoked speculation that the European CentralBank may ease further.
Weakness in the euro helped buoy the dollar to a two-weekhigh against a basket of currencies. The dollar also gainedafter the Federal Reserve on Wednesday dropped a reference totightening financial conditions in its post-meeting statement.
Euro-zone inflation fell to nearly four-year lows in Octoberand unemployment was stuck at record highs in September,increasing pressure on the ECB to do more to encourage economicrecovery. The ECB meets next Thursday.
"The euro is slumping today and for good reasons. Inflationis falling, the economy is slowing down, the unemployment rateis over 12 percent, and all signals now point to an ECB thatwill turn from hawk to dove," said Jonathan Lewis, leadportfolio manager of the Samson STRONG Nations Currency Fund inNew York.
The euro fell 1.1 percent to $1.3583, not far from asession low of $1.3582, according to Reuters data. At currentprices, it was on track for its biggest daily fall sincemid-April.
The euro lost 1.3 percent to 133.53 yen. It alsolost 1.1 percent against sterling to 84.67 pence.
The dollar index, which tracks the greenback versus abasket of six currencies, rose 0.6 percent to 80.234, its fifthstraight day of gains. Last week, the index hit a nine-month lowof 78.998 on Friday.
Traders unwound bearish dollar positions that have reachedextended levels after Wednesday's Fed meeting bolstered viewsthat the U.S. central bank could roll back stimulus sooner thanmany expected. In recent weeks, investors have pushed backexpectations for a tapering of stimulus until March 2014.
"Although the amendments to yesterday's release didn't causeas much of a jolt as seen back in September, the statementdidn't provide the 'uber-doves' enough ammo, causing some of theweaker U.S. dollar bears to capitulate," said Scott Smith,market analyst at Cambridge Mercantile Group in Calgary,Alberta.
The Fed shocked financial markets last month by opting notto scale back its bond buying.
In a snapshot of the U.S. economy, an index of businessactivity in the U.S. Midwest surged past expectations inOctober, while weekly initial unemployment claims fell,countering recent evidence of soft economic growth.
The dollar could gain further should upcoming data exceedexpectations. One of the data highlights next week will be theOctober nonfarm payrolls report on Nov. 8.
Some analysts also said the euro, which has gained about 7percent since early July, has lost momentum. The single currencyhit a 23-month peak of $1.3832 on Friday. Traders said theeuro's failure to make a sustained break above $1.3800 left itvulnerable to a correction.
Comments from ECB Governing Council member Ewald Nowotnythat the central bank would provide more liquidity when cheaplong-term loans it made in late 2011 and early 2012 expire alsoweighed on the single currency.
The dollar last traded down 0.2 percent at 98.32 yen,according to Reuters data.
For the month, the euro climbed 0.4 percent against thedollar, its second straight month of gains.
The dollar, however, rose 0.1 percent versus the yen, itsthird consecutive monthly advance.
- USA News