The Euro declined on Tuesday as dismal euro zone service sector data fueled expectations the European Central Bank might follow the United States in cutting interest rates. Meanwhile, the Dollar pared early US gains versus the Yen after a report showed a sharp drop in activity in the US service sector as well in January. The weak data reinforced fears the economy is slowing even as the Federal Reserve cuts rates aggressively to revive growth.

EurUsd fell more than 1% after figures showed service sector growth across the 15-nation bloc slowed in January to its most sluggish in 4-1/2 years. Germany, Spain and Italy registered contractions. A separate report showed euro-zone retail sales defied expectations of a monthly rise in December and fell, underscoring a slowing economy.

At yesterday close, EurUsd was down about 1.28% at 1.4635, its steepest one-day loss since mid-January. The Euro's weakness helped lift the Dollar across the board despite the weak US service sector data.

The ECB meets to set interest rates on Thursday and is mostly expected to keep them on hold at 4%.

UsdJpy traded down 0.18% at 106.53 after earlier climbing as high as 107.74. The US currency gave up all its gains after the dismal showing in the ISM’s non-manufacturing Index. The Index stepped in January to levels not seen since the 2001 recession.

The Fed's aggressive rate cuts in recent months lent some support to the Dollar as investors took the view the bold action would sustain the US economy and fuel a recovery later in the year. The Fed has already slashed its key rate by 225bp and is seen cutting at least another 75bp by the end of the year.

Futures markets expect the ECB to cut rates by 50bp by the third quarter and are split on a further 25bp easing before the end of the year.

The Bank of England also meets to set rates on Thursday and is expected to cut borrowing costs 25bp to 5.25%. It would be its second rate cut in three months.

AUD dropped even as benchmark borrowing costs rose to an 11-year high of 7%. AudUsd traded down 1.27% at 0.8958.