Euro falls as ECB rate cut speculation grows

Although a Reuters poll last week showed economists expected the ECB to keep rates on hold this Thursday, some strategists said euro weakness would persist on growing expectations bank chief Mario Draghi would hint at future cuts.

Poor euro zone sentiment and unemployment data since last week could compel the ECB to revise down its outlook of the currency bloc's economy and consider earlier rate cuts, they said.

Italy's inconclusive election last week also weighed on the currency. Analysts are concerned that without a stable government, the country will be unable to pass reforms required to get its borrowing and debt under control.

"The ECB will be in defensive mode and they may cut rates this meeting, while the political uncertainty in Italy is a good reason to be bearish on the euro, which could tend to trade lower," said John Hardy, currency strategist at Saxo Bank.

The euro hit a session low of $1.2982, not far from a 2-1/2 month low of $1.2966 touched on Friday, after data showed euro zone sentiment tumbled in March on renewed political uncertainty in Italy.

The single currency was last down 0.2 percent on the day at $1.2998. Option expiries at $1.3000 could keep the euro pinned around that level. Analysts said any rebounds from here would be short-lived as they would sold into.

Options barriers were cited at $1.2950, which could limit further euro falls for now. A break through that level could see it fall to its next support at $1.2850, its 200-day moving average.

The benchmark one-month risk reversal, which measures the relative demand for put and call options, was dealt at 1.35 vols in favor of euro puts -- bets that the currency will fall.

"The euro is down on a general risk-off mood... Draghi could be more dovish and there could be a rate cut this week. If not, he could signal something is in the offing," said Jane Foley, senior currency strategist at Rabobank.

Citi said it had recommended investors add a three-month euro put/dollar call option, targeting $1.27.

Euro zone services Purchasing Managers' Index surveys on Tuesday and growth data on Wednesday could push the euro even lower if they undershoot forecasts.

"We suggest watching this week's release of fourth-quarter GDP. A further weak reading here will put the euro under additional pressure... euro/dollar has already tested and slightly breached the $1.30 area. A sustained move below targets 1.2660, in our view," analysts at Morgan Stanley said in a note.

DOLLAR STRENGTH

The gloomy euro zone data contrasted with a jump in U.S. manufacturing and this helped push the dollar to a six-month high of 82.509 against a basket of currencies .DXY on Friday . It last stood at 82.379, up 0.1 percent on the day.

Broad U.S. spending cuts that automatically kicked in on Friday and threaten to dampen economic growth have so far not hurt the U.S. currency. In fact, currency speculators' bets in favor of the dollar surged in the week ending February 26.

The dollar was flat at 93.56 yen. The Japanese currency showed little reaction to comments from Haruhiko Kuroda, the government's nominee as next Bank of Japan governor, who set out aggressive policy ideas on Monday.

Investors discarded growth-linked currencies such as the Australian dollar after China announced measures to tighten curbs on the property market. The Aussie fell to a near eight-month low of $1.0116 and was last down 0.7 percent on the day at $1.0135.

(Editing by Nigel Stephenson)

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