LONDON (Reuters) - The euro fell to a one-week low against the yen and dropped below $1.10 on Wednesday, before a meeting of the European Central Bank, which is expected to take interest rates deeper into negative territory and ease monetary policy yet more.
The ECB is expected to cut the deposit rate by 10 basis points to -0.40 percent, announce more asset purchases and possibly introduce tiered interest rates like the Bank of Japan in a bid to boost inflation.
The euro was down 0.7 percent at 123.08 yen EURJPY= and 0.4 percent lower against the dollar at $1.0963 EUR=, inching back toward a one-month low of $1.08255 struck on March 2.
Those positioning for more losses in the euro are, however, wary about placing significant bets against it after being burned in December, when the ECB eased policy less than expected, leading the euro to rise 4 percent against the dollar.
"Given expectations are so high that the ECB will ease policy, there is a chance that it could fall short and we could see a bounce in the euro," said Niels Christensen, FX strategist at Nordea.
With a 10 basis points cut almost factored in, investors who are betting against the euro are hoping for a bigger rate cut to take the euro lower to around $1.08.
"The market is not heavily positioned and has been caught the wrong way a couple of times recently," said John Hardy, head of currency strategy at Saxo, adding investors were uncertain on how to react to policy signals after the December meeting.
The yen, meanwhile, extended gains, cementing its role as a winner so far this week after China's exports tumbled by the most in more than six years last month. The soft China data highlighted risks facing the global economy, bolstering expectations for dovish outcomes at central bank policy reviews in Europe, Canada and New Zealand.
The New Zealand dollar traded higher as stock markets recovered in Europe. It was last trading at $0.6780 NZD=D4, off Friday's peak of $0.6820. While markets imply a small chance of a rate cut by the Reserve Bank of New Zealand on Thursday, investors suspect it is only a matter of time before it delivers another cut to the 2.5 percent cash rate.
In contrast, the Bank of Canada is expected to keep rates on hold on Wednesday. The Canadian dollar was slightly higher on the day, trading at C$1.3385 per USD CAD=D4, having struck a 3-1/2-month peak of C$1.3262 set on Monday. BOCWATCH
Additional reporting by Shinichi Saoshiro; Editing by Andrew Heavens and Hugh Lawson