Euro falls against dollar on lower inflation

The euro dropped versus the dollar in European trading on Friday as news of plunging inflation and higher unemployment in the eurozone raised expectations of lower interest rates for the 15-nation bloc, analysts said.

In late morning London trade, the euro fell to 1.2866 dollars from 1.2904 dollars late in New York on Thursday.

Against the Japanese currency, the dollar eased to 95.28 yen from 95.30 yen on Thursday.

Inflation in the 15 euro countries plunged in November to a 14-month low in the face of slumping oil prices, an official EU estimate showed on Friday, paving the way for deep interest rate cuts.

"November's drop in eurozone CPI inflation and a pick-up in the unemployment rate in October support our view that ECB interest rates will fall to a record low next year," said Capital Economics analyst Jennifer McKeown.

Lower interest rates usually make a currency less attractive to investors. However recently markets have been favouring the yen despite very low Japanese rates as it is seen as a haven in the financial storm.

Annual eurozone inflation dropped to 2.1 percent this month from 3.2 percent in October as consumer prices grew at the slowest pace since September 2007, the Eurostat data agency said.

Down sharply from a June and July record high of 4.0 percent, the rate also came in below economists forecasts for 2.4 percent, as polled by Dow Jones Newswires.

Economists said the drop set the stage for a steep cut in interest rates by the European Central Bank when it meets exceptionally in Brussels next Thursday for a monetary-policy setting meeting.

"Pressure is mounting on the ECB to deliver a deeper interest rate cut next Thursday than the 50 basis point reduction from 3.25 percent... widely expected," said economist Howard Archer at consultants IHS Global Insight.

"Indeed, there is a compelling case for a 100 basis point cut to 2.25 percent," he said.

Separately, official EU data published Friday showed unemployment in the 15 nations using the euro had nudged upwards in October to 7.7 percent -- the highest in nearly two years.

The rate, the highest since January 2007, was up from 7.6 percent in October and 7.3 percent, revised data from the European Union's Eurostat data agency showed.

Meanwhile the dollar was on the backfoot slightly against the yen as expectations mounted that the Federal Reserve will cut interest rates at its meeting next month, traders said.

The greenback was pressured as markets bet that US lending rates will be reduced again at the Fed's December 15-16 meeting from the current level of 1.0 percent, Sumitomo Trust Bank chief forex strategist Saburo Matsumoto said.

"How aggressively central banks cut interest rates next week will play a key role in whether fears of a global recession continue to recede," said NAB Capital analyst John Kyriakopoulos.

Markets are also expecting big interest rate cuts by the Bank of England next week to try to contain the recession.

In London trade on Friday, the euro changed hands at 1.2866 dollars against 1.2904 dollars late on Thursday, at 123.09 yen (122.90), 0.8385 pounds (0.8376) and 1.5479 Swiss francs (1.5483).

The dollar stood at 95.28 yen (95.30) and 1.1979 Swiss francs (1.2007).

The pound was at 1.5413 dollars (1.5390).

On the London Bullion Market, the price of gold fell to 812.70 dollars an ounce from 814 dollars late on Thursday.

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