During early deals on Monday, the euro fell to new multi-day lows against its US and British counterparts as the European Central Bank Vice President Lucas Papademos said yesterday that the central bank may be in need of further rate cuts in order to protect the economy from recession. Addressing a conference of economists at San Francisco, Papademos noted that interest rate cuts could be warranted if price stability is threatened by weakening inflation. The ECB aims to keep inflation below but close to 2% over the medium term. The ECB has already reduced its benchmark interest rates by 175 basis points to 2.5% since October. Economists forecast another cut of at least 50 basis points in its next meeting on January 15. In November, inflation had slowed to 2.1% from 3.2% in October. The Eurostat is set to release the flash estimate of euro area inflation for December on January 6. The central banker stated that the ECB will do what is necessary to ensure price stability. He said that monetary policy cannot solve the euro zone's economic issues by itself, and must be complemented with market regulation. He added that long-term implications for price stability should be given higher priority while slashing interest rates to low levels. With regard to inflation, he said the rate is expected to fall notably in the first half of the year with no risk of deflation. The central banker noted that the creation of the euro common currency has played a role in keeping inflation down, and enduring low inflation has boosted the ECB's reputation. The euro has been in effect for 10 years and is now the currency for 16 European nations. The Euro zone economy had entered its first recession since the adoption of Euro by contracting 0.2% sequentially in the third and the second quarters of 2008. Papademos also added that ECB members need more information and analysis before revising any of their mid-term or long-term growth forecasts. In economic news, results of the latest Sentix survey showed that the headline index for Euro zone rose to minus 34.4 in January from a record low level of minus 42.3 logged in December. The index improved in January after declining for six straight months. Among the sub indicators, the current situation index rose to minus 37.25 from minus 42.5, while the expectations index stood at minus 31.5, up from December's minus 42. Against its US counterpart, the single currency touched a 20-day low of 1.3658 by about 6:10 am ET Monday. This may be compared to Friday's closing value of 1.3883. If the euro slips further, 1.338 is seen as the next likely target level.

Source