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GLOBAL MARKETS-Euro on the ropes after dive in inflation

* Euro remains under pressure after biggest fall vs dollar

in 6 mths

* European shares lower but head for 4th week of gains

* Solid China manufacturing data limits Asian share losses

* Dollar index at 2-week peak after US data suggests economy


* Wall Street expected to inch higher

By Marc Jones

LONDON, Nov 1 (Reuters) - The euro tumbled to a two-week low

on Friday after a plunge in euro zone inflation left markets

suddenly eyeing the possibility of an interest rate cut by the

European Central Bank next week.

European shares saw a subdued end to what looked to

be a fourth week of gains, but the combination of Thursday's

surprise dive in inflation to just 0.7 percent and a revitalised

dollar kept the main focus on the fragile euro.

After its biggest fall in six months in the previous

session, the shared currency shed a further 0.6 percent to

$1.3513, leaving it flirting with its biggest weekly drop since

July last year.

"It is clear that there has been a major sentiment change on

the euro," said John Hardy, head of FX strategy at Saxo bank in


"The ECB's single mandate has always been on inflation so

this gives Draghi and co further reason to do something at next

week's meeting. We see considerable further downside, the likes

of euro/dollar back into the old range, down towards $1.30."

A handful of big banks including UBS, RBS and Bank of

America/Merrill Lynch revised their calls saying they now expect

a rate cut next week and the pressure on the euro increased

after banks made their biggest repayment of ECB crisis loans

since April.

The move was also amplified as the dollar continued

to kick away from a recent nine-month low, boosted by upbeat

U.S. data overnight that added to the debate on future Fed


U.S. S&P E-mini futures edged up about 0.2 percent,

pointing to a slightly higher start on Wall Street, after the

S&P 500 Index closed down about 0.4 percent on Thursday

but still gained 4.5 percent for the month.

Stock markets across Europe were between flat and down 0.5

percent, ahead of the

U.S. restart, pegged back by signs of third-quarter weakness at

some major European firms.

At the same time, the return of bets on an ECB rate cut saw

euro zone government bonds extend this week's gains.


Markets' focus remains heavily on U.S. monetary policy and

how soon the Federal Reserve will begin tapering back its $85

billion a month support programme, having delayed a move in


The ISM survey of manufacturing for October will give

investors the latest temperature reading on the state of the

U.S. economy after some upbeat PMI data on Thursday.

"If the ISM report is better than expected, it could add to

revived tapering expectations, and U.S. yields and the dollar

could go up and stocks could go down," said Masashi Murata,

senior currency strategist at Brown Brothers Harriman in Tokyo.

Not all players are convinced that this week's U.S. newsflow

heralds a shift in monetary policy expectations, given the

disruption caused by last month's Federal shutdown.

"The existence of noise in the October data will likely make

it difficult for the Fed to gather enough evidence to start

tapering in December," strategists at Barclays said in a note.


In Asian trading, reassuring signals on China's factory

activity offered support to the region's markets

, though Tokyo's Nikkei finished at a

one-week low as the yen strengthened against the euro.

Among commodities, gold dropped to $1,313 an ounce

leaving it at its lowest in nearly two weeks, hurt by sharp

losses in the previous session from month-end profit-taking, the

strong U.S. economic data and the higher dollar.

Copper got a lift from the China data, rising to

$7,282 a tonne and back toward a one-week peak of $7,300 hit on

Thursday. But it was not enough to help oil, with Brent

falling back to $107.8 a barrel as U.S. crude slid to


"There were reports that some of the ports in Libya were

reopening and any signs that that oil is coming back online is

going to hit the oil price," said Abhishek Deshpande, oil market

analyst for Nataxis in London.

"There are also signs of generally lower season demand for

oil at the moment as China's refineries go into maintenance."