LONDON (MarketWatch) -- The European single currency and the British pound lost ground versus the dollar Wednesday, pressured by renewed risk aversion and expectations for big rate cuts by the European Central Bank and the Bank of England on Thursday.
Purchasing managers indexes for the 15-nation euro zone and Great Britain indicated a sharp decline in activity in the services sectors, underlining expectations the central banks will take aggressive action. See full story.
The dollar index , which tracks the performance of the dollar against a trade-weighted basket of six major currencies, was at 87.021, up from 86.555 in North American activity late Tuesday.
The euro fell back to $1.2656 from $1.2710. But the dollar slipped versus the Japanese currency to 92.98 yen, down from 93.14 yen late Tuesday.
The British pound slipped back to $1.4771 from $1.4916.
The final Markit euro-zone services PMI fell to 42.5, slipping from a preliminary estimate of 43.3 and down from 45.8 in October. The November reading is the lowest since the survey began more than a decade ago. A reading of less than 50 signals a decline in activity, while a figure of more than 50 signals expansion.
Separately, data from the statistical agency Eurostat showed a steeper-than-expected 0.8% monthly decline in October euro-zone retail sales volume, for an annual fall of 2.1%.
Markets were expecting a 0.4% monthly drop and a 1.5% year-on-year decline.
"In all, the continued run of terrible news on the real economy supports our view that ECB interest rates are set to fall pretty quickly," said Jennifer McKeown, European economist at Capital Economics.
She expects the ECB to cut its key rate by a half point to 2.75% when it meets Thursday, "although a bigger move is certainly possible."
And regardless of the size of the cut, the key rate is set to fall to a record low of 1.5% in the first half of 2009, McKeown said.
In Britain, the CIPS/Markit services PMI reading fell to 40.1 -- the lowest since the survey began in July 1996 and marking the seventh consecutive month that activity has been on the decline. Consensus expectations were for a reading of 41.3 after a figure of 42.4 in October.
Recent data shows that the Bank of England's decision last month to slash its key rate by 1.5 percentage points to a five-decade low of 3% hasn't had the desired effect on consumer confidence or the services sector, said Benjamin Williamson, an economist at the Center for Economic and Business Research.
"We still believe the bank will cut rates by a full [percentage point] on Thursday, bringing the rate to a joint all-time low of 2%," he said, adding that a larger move can't be ruled out.
Meanwhile, the pound "has fallen sharply this week -- risk aversion, weakening economic data, falling cyclical support (as interest rate expectations are pared back) and the requirement to fund a current account deficit have left sterling under pressure," wrote Naeem Wahid and Ashley Garvin, currency strategists at HBOS, in a research note.
That's left the pound eyeing support at last month's low of $1.4550, they said.
A rise in overall risk aversion was also benefiting the dollar, traders said.
Asian stocks lost ground Wednesday. European indexes were on the defensive and U.S. stock index futures were lower following Wall Street's partial rebound Monday.
