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Euro falls to an eight-month dollar low

Wednesday, July 30 13:02:37

The euro hit an eight-month trough against the dollar today and German bond yields were near record lows ahead of inflation data expected to boost the case for further policy easing by the European Central Bank.

Investors were also awaiting a statement from the Federal Reserve following its policy meeting that some expect to signal a more hawkish policy outlook, and data likely to show the U.S. economy bouncing back strongly in the second quarter.

U.S. stocks were set to open slightly higher while European shares were flat as leading cement makers took a hit after disappointing results.

The euro fell to $1.3395, its lowest since November 2013, before recovering to $1.3400, down around 0.1 percent on the day after data showing Spanish consumer prices surprisingly fell 0.3 percent in July from a year before.

Figures released at the same time showed that, in the three months to June, Spanish economic growth hit its fastest since before the financial crisis.

In Germany, an initial batch of regional price data showed inflation falling well below 1 percent even in the euro zone's dominant economy.

Traders said that if federal German inflation data, due at 1200 GMT, also came in below forecasts, it would intensify pressure on the ECB to print money to support growth and avert broader deflation risks.

The ECB cut all its interest rates in June and promised up to 1 trillion euros in cheap long-term loans to banks from September, but kept the door open to a program of large-scale asset purchases, known as quantitative easing (QE).

"The likelihood that the ECB will need to do QE at the end of the year is sharply increasing," said Alessandro Giansanti, senior rate strategist at ING.

The contrast between the moribund euro zone economy and an increasingly robust U.S. recovery is one factor in the dollar's rise this week to a six-month high against a basket of six major currencies. The dollar index was last at 81.31.

The Commerce Department is expected to report on Wednesday that the economy grew at a 3.2 percent annual pace in the second quarter, after it shrank 2.9 percent in the previous quarter.

Federal Reserve chair Janet Yellen is not due to hold a news conference after the U.S. central bank's two-day meeting, and the Fed will not update its economic forecasts, leaving a statement scheduled for release at 1800 GMT as investors' focus.

On Friday, the Labor Department's key nonfarm payrolls report is expected to show a rise of 231,000 jobs in July after an increase of 288,000 in June. The jobless rate is expected to hold steady at 6.1 percent.

With U.S. unemployment dropping over the last few months and inflation firming, some believe the Fed could adjust its wording to suggest a willingness to hike interest rates sooner rather than later as the bank approaches its "full employment" mandate.

The yield on the benchmark 10-year U.S. Treasury note stood at 2.467 percent, not far from its U.S. close of 2.462 percent on Tuesday, when it got support from German, Italian and Spanish government debt yields hitting record lows.

German 10-year bond yields, the benchmark for euro zone borrowing costs, were flat at 1.12 percent, having hit an all-time low of 1.11 percent on Tuesday.

"That widening yield spread differential is beginning to weigh more heavily on the euro," said Lee Hardman, a currency economist at the Bank of Tokyo-Mitsubishi UFJ. (Reuters)

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