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The euro lost ground on Thursday after Jean-Claude Trichet, president of the European Central Bank, warned over eurozone growth and signalled that moentary tightening might have ended in the region.
The ECB, as expected, kept its main lending rate at 1.5 per cent at its policy meeting after raising rates in April and July.
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But traders were focused on the post-decision press conference from Mr Trichet for a sign that the central bank was abandoning its hawkish stance on interest rates.
Expectations that the ECB would turn to a more neutral view on rates has heightened in recent weeks amid escalating fears over eurozone debt and increasing worries over the health of the regions’ economy.
The single currency fell after Mr Trichet said the downside risks to the eurozone economy had intensified.
“We expect the euro area economy to grow moderately, subject to particularly high uncertainty and intensified downside risks,” he said.
Mr Trichet added that eurozone inflation should fall below 2 per cent in 2012, and price risks were “broadly balanced”. That marked a change from last month, when he said there were “upside risks to price stability”, indicating that the ECB may have abandoned its hawkish bias on interest rates.
The euro fell 0.8 per cent to $1.3989 against the dollar and was down 0.8 per cent at £0.8740 against the pound.
Meanwhile, the pound recovered from an eight-week low against the dollar after the Bank of England, as expected, left UK interest rates at a record low of 0.5 per cent and made no change to its £200bn asset purchase programme after its policy meeting.
Sterling advanced given that some had believed there was outside chance the Bank would announce a further round of quantitative easing.
Lena Komileva at Brown Brothers Harriman said calls for further monetary easing in the UK had risen in response to recent disappointing economic data.
“We think that the debate for further easing will gain traction over the coming months, particularly given the lack of scope for delivering further economic stimulus on the fiscal policy front and the sharp tightening of UK financial conditions produced through the global risk turmoil over the summer,” she said.
The pound rose 0.1 per cent to $1.6004 against the dollar, up from the two-month low of $1.5912 it hit earlier in the session.
Elsewhere the dollar advanced ahead of a speech from Barack Obama, US president, in which he is expected to announce a $300bn stimulus package.
The dollar rose 0.1 per cent to Y77.30 against the yen, climbed 0.8 per cent to SFr0.8642 against the Swiss franc and was 0.3 per cent higher at $1.0624 against the Australian dollar.
