The euro extended losses versus the U.S. dollar and other major currencies Tuesday after inflation data and a closely watched gauge of economic activity reinforced expectations for aggressive rate cuts by the European Central Bank.
The euro was already on the defensive when the statistics agency Eurostat reported in a preliminary estimate that consumer inflation across the then-15-nation euro zone slowed to an annual rate of 1.6% in December from 2.1% the previous month.
That puts annual CPI in line with or below the ECB's target of near but just below 2% for the first time since August 2007 and further confirms a sharp reversal in inflation pressures. See full story.
The euro traded at $1.3369 against the dollar in recent trade, down from $1.3588 in North American trade late Monday. The euro traded as low as $1.3347, its weakest level versus the dollar since mid-December.
The euro was down 1.1% against the Japanese yen to 125.83 yen. After ending last year with a push toward parity against the beleaguered British pound, the single currency retreated 1.4% against sterling to 91.38 pence.
Earlier, the Markit euro-zone composite purchasing-managers index for December fell to 38.2, slightly below a preliminary estimate of 38.3 and down from the previous all-time low of 38.9 posted in November.
The figure -- the seventh straight monthly decline -- signals the steepest contraction in the private-sector economy since the survey began in 1998, Markit said.
"Overall, the picture for the euro zone is much like that for the U.K.; a sharp recession with few prospects for a speedy recovery," wrote Richard Snook, senior economist at the Center for Economic and Business Research.
"The euro, having approached sterling parity as we forecast, is now looking increasingly expensive with Bank of England and European Central Bank base rates set to narrow over coming months," he said.
The U.S. Federal Reserve has already effectively cut its key interest rate to zero. The European Central Bank has cut its key rate to 2.5% from 4.25% since October.
The Bank of England's rate-setting Monetary Policy Committee is expected Thursday to cut its key lending rate by at least 50 basis points, or half a percentage point, to 1.5% -- the lowest level since the central bank was founded in 1694.
The dollar was higher against most other major rivals, rising to 93.90 yen versus the Japanese currency from 93.41 yen late Monday.
The British pound edged lower to $1.4627 from $1.4682.
The dollar index , a measure of the greenback against a trade-weighted index of six major currencies, rose to 83.469 from 82.734.
Strategists said a stronger tone in most Asian and European equity markets appeared to be boosting dollar sentiment - marking a break from the dollar's pattern last year of rallying when stocks fell and declining when they rose.
"Either we are witnessing the starting point of a break of the relationship between equities and euro/U.S. dollar or markets are currently moving into unsustainable territory," wrote strategists at BNP Paribas.
