Euro sags after inflation data, EM steady after rout

Fri Jan 31, 2014 6:53am EST
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By Marc Jones

LONDON (Reuters) - The euro fell and the bloc's government bonds rallied on Friday as weaker-than-expected inflation data increased pressure on the European Central Bank to either cut rates or employ other easing tools at its meeting next week.

Eurostat's first reading of January inflation showed it slowed back down to 0.7 percent, the level that saw the ECB catch markets off guard with a rate cut in November.

The banks sees 2 percent inflation as optimal for the region's economy and with little chance of being anywhere near that level anytime soon, calls have been intensifying on it to take more aggressive action.

"It's now more likely than ever that Draghi is going to have to step in with some extraordinary measure to stave off deflation," said Aberdeen Asset Management fixed income investment analyst Luke Bartholomew.

"The big challenge is exactly what to do. With the store cupboard of conventional measures largely bare, any policy action is likely to be unprecedented."

While more forward-looking data has painted a brighter picture for the euro zone and its debt strained periphery members, unemployment figures, which came alongside the inflation reading, remained at a record high.

Whatever form it takes, the prospect of more ECB easing sent the euro lower against its major currency peers and pushed down the all-import money market rates which are the benchmark for borrowing costs in the bloc.

The euro was last at $1.3541 against the dollar having started the week at $1.37, while euro zone government bonds which become more attractive the lower borrowing costs go, rallied. <GVD/EUR>   Continued...

A man looks at at an electronic stock quotation board outside a brokerage in Tokyo January 14, 2014. REUTERS/Issei Kato