LONDON (MarketWatch) -- The European single currency lost ground versus the dollar, while the British pound was virtually flat in choppy trade ahead of expected rate cuts from the European Central Bank and the Bank of England.
Falling equity markets in Asia and Europe signaled an ongoing bout of rising risk aversion, lifting the Japanese yen, strategists said.
The Frankfurt-based ECB and the Bank of England are both expected to slash key rates by at least half of a percentage point. And an increasingly dire economic outlook for Britain and the euro zone have led a large minority of economists -- and credit markets -- to pencil in potentially larger cuts. See full story.
The Bank of England will announce the decision of its rate-setting Monetary Policy Committee at 7 a.m. Eastern. A half-point cut would take its key lending rate to 4%.
The ECB's Governing Council is set to unveil its decision at 7:45 a.m. Eastern, followed by ECB President Jean-Claude Trichet's monthly news conference at 8:30 a.m. Eastern. A half-point cut would leave the ECB's key rate at 3.25%.
Analysts said the foreign-exchange market's reaction to bigger-than-expected rate moves may not be clear at first.
"We look for a minimum of 50 basis points each from the BOE and ECB today, and we expect the policy statements to 'marginally temper' market expectations for more easing of the same magnitude straight away," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
"The case for an even larger cut in the U.K. in the order of 75 or 100 basis points is certainly compelling, and both the euro and sterling should see short-term strength on such a move," Gallo said.
In both cases, a larger-than-expected easing would be a positive sign for the long-term economic outlook, a potential positive for the currencies, said strategists at Commerzbank.
On the downside, it would significantly cut the yield differential with the U.S. Federal Reserve's official rate of 1%.
Regardless, the potential for a continued rise in risk aversion amid unsettled financial conditions is likely to leave the euro and the pound under pressure against the dollar, they said.
"Also, the lack of liquidity in currency markets makes for very erratic and choppy exchange-rate movements," they wrote. "We think that the euro is likely to ease on the decision and the [euro] is likely to fall towards $1.2650" versus the dollar.
The dollar index , a measure of the greenback against a trade-weighted basket of six currencies, was slightly higher at 84.855, up from 84.794 in late North American trade Wednesday.
The euro fell to $1.2885 from $1.2948, while the British pound sterling was little changed at $1.5919 versus $1.5926.
The dollar retreated against the Japanese unit, slipping to 97.66 yen from 98.41 yen. The yen also gained on the euro, with the European unit slipping to 125.83 yen from 127.45 yen.
