Euro slips against dollar ahead of expected ECB rate cut

The euro slipped further against the dollar late Monday as the market bet that the European Central Bank will cut eurozone interest rates sharply later this week.

Dealers said the ECB is expected to lower rates by at least 0.50 percentage points and possibly more after eurozone inflation tumbled to 2.1 percent in November, within sight of the ECB's less than 2.0 percent target.

The fall should allow the ECB room to go further in the future in the face of a dramatic economic slowdown.

Stock markets in Europe and the United States plunged on Monday after a deluge of bad economic data pointing to a severe global slowdown and reversing many of the gains made last week.

"There will be a plethora of bad news on economic growth so central banks will need to act boldly to prevent sentiment hitting rock bottom once again," warned NAB Capital analyst John Kyriakopoulos.

The Japanese central bank also said it was preparing new measures to tackle a worsening credit crunch as officials warned the country could slip back into deflation next year.

Another set of weaker-than-expected US data -- the November Institute of Supply Management Index hit its lowest level since May 1982 -- put the dollar under some pressure against the yen.

In London trade late Monday, the euro fell to 1.2621 dollars from 1.2695 dollars late in New York on Friday.

The dollar was in turn weaker at 93.99 yen, down from 95.44 yen on Friday.

Dealers said the week will be dominated by data and interest rate decisions in the eurozone and Britain, alongside a series of others in smaller economies.

"Evidence continues to build suggesting that these central banks have further aggressive monetary easing to undertake," said Derek Halpenny at Bank of Tokyo-Mitsubishi

"The latest decline in the ISM manufacturing index ... is another illustration that this recession is going to be both severe and prolonged." said Paul Ashworth of Capital Economics.

An ECB rate cut would be its third in less than two months, reflecting the seriousness of the current downturn, while the Australian and New Zealand central banks are also expected to lower lending costs this week.

"We expect to see aggressive policy easing in all cases," Standard Chartered analysts wrote. "This presents downside risks to all these currencies against the dollar this week."

The dollar slipped against the yen ahead of key US employment data due Friday which will likely pave the way for another US rate cut too.

In late London trade on Monday, the euro changed hands at 1.2621 dollars against 1.2695 dollars late on Friday, at 118.39 yen (121.19), 0.8499 pounds (0.8255) and 1.5258 Swiss francs (1.5408).

The dollar stood at 93.99 yen (95.44) and 1.2111 Swiss francs (1.2131).

The pound was at 1.4818 dollars (1.5367).

On the London Bullion Market, the price of gold plunged to 778 dollars an ounce from 814.50 dollars late on Friday.