* Euro falls for fifth day as inflation slows
* UBS expects ECB rate cut next week
* Euro/dollar implied vols jump on renewed spot weakness
By Anirban Nag
LONDON, Nov 1 (Reuters) - The euro fell to a two-week low
against the dollar on Friday, extending losses to a fifth day as
slowing euro zone inflation led some in the market to forecast a
near-term European Central Bank rate cut.
A cut would hurt the euro's rate advantage over other major
currencies. The euro's weakness was broad-based; it hit a near
three-week low against the yen and a two-week trough
Its losses triggered fresh demand to hedge against further
weakness with one-month euro/dollar implied volatilities
hitting their highest in three weeks at 7.2 percent.
In higher volumes than of late, the euro fell to
$1.3508 in European trade, its lowest since Oct. 16. It was last
down 0.4 percent at $1.3530, having fallen 1.1 percent on
Thursday. The losses left it on track for its worst weekly
performance since early February.
The euro's fall accelerated after data on Thursday showed
euro zone inflation fell to a four-year low of 0.7 percent in
October, way under the ECB's target of just below 2 percent.
"In light of those inflation numbers, we have changed our
call and are now expecting the ECB to cut its main refinance
rate at next week's meeting," said Geoffrey Yu, currency
strategist at UBS.
"While some in the market have priced that in, quite a few
haven't. We recommend investors to hold short positions in the
euro and add to those positions after the ECB meeting."
A depressed euro zone labour market, with unemployment still
at record highs in September, will give the ECB another reason
to consider easing policy at next Thursday's meeting.
Thursday's jobs report included revisions to previous
months' data, bolstering a widely-held view that an elevated
currency is the last thing euro zone policymakers want.
"Our economists now forecast a rate cut in December," said
analysts at BNP Paribas. "Given that the market has under-priced
this risk, we think that there is substantial scope for the euro
to weaken in the next few weeks."
Options traders cited renewed demand for euro puts or bets
the currency will fall. One-month risk reversals
- a measure of relative demand for options on a currency rising
or falling - were at 0.7 vols in favour of euro puts.
Just a week ago, there was a slight bias for euro calls - or
bets it would gain.
Renewed pressure on the euro saw the dollar index rise to a
two-week high of 80.547, pulling further away from a
nine-month trough of 78.998 plumbed a week earlier.
The dollar was helped by Thursday's strong Chicago business
activity survey, which fuelled speculation the national ISM
survey of manufacturing, due later on Friday, could also deliver
a positive surprise.
The upbeat data revived speculation the Federal Reserve may
scale back stimulus at its December meeting, though many still
tip March as the likeliest window for a move.
- Budget, Tax & Economy