The euro slipped to its lowest point in three weeks on Tuesday, dragged down by mounting speculation that the European Central Bank will continue its rate cut campaign in the face of declining inflation across the euro zone, AP reported. In morning trading, the 16-nation currency dropped to a low of $1.3397 before recovering slightly to $1.3439 in midmorning trading compared with $1.3602 in late New York trading on Monday. The last time the euro fell below $1.34 was Dec. 12. The drop was the result of investor expectations that the ECB, which meets Jan. 15, will likely continue cutting interest rates for the euro zone from its current 2.5 percent, after Eurostat's provisional estimate of consumer price inflation found that it fell from 2.1 percent to 1.6 percent in December. «Falling inflation creates more scope in monetary policy for the ECB,» said Commerzbank analyst Christoph Weil in a statement. «We believe the ECB is likely to cut the key rate in the next few months by a further 150 basis points to 1 percent.» The ECB's chief mandate is to keep inflation just below 2 percent. Inflation surged to twice that rate in mid-2008 before leveling off at the end of the year amid the financial meltdown. Also hurting the common currency was a further drop in the purchasing managers' index for the euro zone services sector to the lowest in the survey's 10-year history. The index shows the economy is contracting and employment is on the rise. The British pound weakened marginally against the dollar, buying $1.4701 compared with $1.4723 on Monday night, with analysts expecting a rate cut by the Bank of England on Thursday from its current 2 percent. «Sterling is also holding up relatively well against the greenback despite the release of some worse than expected house price data from the Nationwide this morning,» Hughes said. Britain has been hurt by plunging house prices and tightened lending between banks despite record interest rate cuts. The Bank of England is expected to lower its own interest rate from 2 percent on Thursday. Cutting interest rates can undermine a currency as investors seek higher returns elsewhere. The interest-rate play for the pound and euro may be diminishing in appeal as their respective central banks appear set to chop rates closer to those in the U.S., Japan and Switzerland _ all hovering around zero. In other trading, the dollar rose to 93.90 yen in trading Monday compared with 93.21 Japanese yen late Monday in New York.
