Euro falls on rate cut expectations

The euro fell sharply against other currencies on Monday amid growing expectations that the European Central bank will cut interest rates sharply this year.

In late European trade, the European single currency dropped to 1.3581 dollars from 1.3910 dollars in New York late on Friday.

Against the Japanese unit, the dollar climbed to 93.70 yen from 91.79 yen on Friday.

"With the dismal data from the eurozone, the ECB will not be able to avoid lowering interest rates considerably further," said analysts at Commerzbank.

This view was bolstered by comments by European Central Bank vice president Lucas Papademos, who told German weekly WirtschaftsWoche that economic uncertainty meant "it's quite possible that the recovery won't start until the beginning of 2010".

"In our view, such comments (from Mr Papademos, who is always conservative in his comments) can be seen as a signal that the (ECB) governing council does envisage some further easing, although this seems to stop short of signalling easing as early as the January 15 governing council meeting," said analysts at Barclays Capital.

The dollar was boosted by expectations that US president-elect Barack Obama's stimulus plans will boost the ailing American economy, dealers said.

"High expectations for Obama appear to be supporting US stocks and the dollar, although conditions surrounding the US economy are still pretty negative," said Yosuke Hosokawa, head of foreign exchange at Chuo Mitsui Trust Bank.

Traders in Tokyo were relieved that there was no major bad news related to the economic crisis during the New Year holidays, Hosokawa added.

Global stock markets have started 2009 on a broadly upbeat note on hopes the US economy will start to recover this year.

But "it is still unlikely the dollar will continue to rise from current levels as players expect bad (US) job figures" on Friday, Hosokawa said.

"Risk-aversion is expected to continue this year as players are still cautious about the prospects" for the US and global economies, he added.

The dollar also strengthened against the euro, which was fluctuating after a widely watched survey showed eurozone manufacturing activity plunging to a record low in December.

Standard Chartered analysts predicted "a broad-based US dollar decline in the first half of 2009" as the economy worsens and the Federal Reserve adopts unorthodox credit measures after slashing interest rates to almost zero.

As well as US jobs data on Friday, the other key event this week is the Bank of England's latest monthly interest-rate policy meeting on Thursday.

The BoE is widely expected to slash British borrowing costs to a record low level under the current 2.00 percent as Britain stands on the brink of recession, according to traders.

With British interest rates already lower than in the eurozone, the pound has fallen to near parity versus the euro, but recovered some ground on Monday.

In late London trade on Monday, the euro changed hands at 1.3581 dollars against 1.3910 dollars late on Friday, at 126.87 yen (127.72), 0.9370 pounds (0.9560) and 1.5033 Swiss francs (1.5034).

The dollar stood at 93.08 yen (91.79) and 1.1028 Swiss francs (1.0865).

The pound was at 1.4550 dollars (1.4544).

On the London Bullion Market, the price of gold fell to 853.50 dollars an ounce from 874.50 dollars late on Friday.