The euro fell broadly on Tuesday on strengthening market views that the European Central Bank will shift to a more aggressive monetary easing stance as inflation continues to fall back. The euro fell to 3-week lows against both the dollar and sterling as a more dovish tone by some ECB policymakers and expectations that euro zone inflation will come below the central bank's target of 2 percent prompted market players to take profits from a euro rally last month. "The recent euro sell-off has been profit-taking after upsides to euro/dollar and euro/sterling failed, but that is almost done," said Geoffrey Yu, currency strategist at UBS in London. The euro faces more downside as "it is the only currency still open to a policy reversal," he said, adding that if inflation comes in below 2 percent as markets expect, there would be no case for the ECB to hold out against rate cuts on price stability grounds. On Monday, ECB Governing Council member Vitor Constancio said monetary policy would respond with interest rate cuts to maintain inflation around 2 percent if necessary. "European monetary policy does not only worry that inflation rises a lot, but also if it falls a lot," he said in Lisbon. That follows remarks by ECB Vice President Lucas Papademos, who said on Sunday that more rate cuts may be warranted to shield the euro zone from recession. At 0904 (4:04 a.m. EST), the euro was down 1.3 percent at $1.3423 after falling to $1.3400, the lowest since December 15. The common currency was also down 1.2 percent at 91.40 pence, after hitting a low of 91.28 pence. It had reached a record high of 98.05 pence last week. The dollar hit a one-month high against the yen at 93.84 yen. The ECB has cut interest rates to help the euro zone economy but the euro still enjoys a comparative advantage over peers such as the dollar and the yen with euro zone rates at 2.5 percent versus close to zero in the United States and Japan. But the euro's recent declines indicate that it will no longer be immune from the region's poor economic data. "Despite the weakening euro zone economy, the euro had a free ride for the last couple of months of 2008, piggybacking on the market's more negative view of other economies, in particular that of the United States and Britain," said strategists at Calyon in a note. Data on Tuesday is expected to show the euro zone's annual inflation rate falling to 1.8 percent in December from 2.1 percent the previous month. Earlier data showed the final reading of Markit Eurozone Purchasing Managers' Index for the euro zone services industry at 42.1 in December, almost unchanged from a flash estimate of 42.0 and lower than 42.5 in the previous month.

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