LONDON (AFX) - The euro continued to flounder below 0.90 usd in midday trade as sentiment took a knock from an unexpectedly weak German Ifo index and a sharp fall in January euro zone industrial output data, dealers said.
Both numbers will increase the pressure on the European Central Bank to reduce interest rates but any move may come too late to bolster the single currency, Deborah Reed, economist at BankAmerica said. For now, the lack of an 'insurance' rate cut is weighing on the euro, she said.
"They are behind the curve, if they had moved sooner there might have been some positive influence," she added.
Reed expects the ECB to reduce rates midsummer although inflation is still likely to remain above the bank's target then.
"It will take some back pedalling," she said.
She also believes the Ifo index and industrial output data are a prelude to a series of weak numbers from the euro zone. Already, data out of individual countries are coming in 0.1 - 0.2 percentage points below consensus forecasts, she added.
The euro zone's January industrial output fell by 1.9 pct on the month for a 5.1 pct year-on-year rise while the German Ifo index, a barometer for confidence in the Euro zone's biggest economy, fell to 94.9 in February from 97.5 in January.
The euro had earlier failed to capitalise on the disappointment over the 50 basis point rate cut in the U.S., dealers said. While a sizeable rate cut had been viewed a foregone conclusion, many had anticipated a 75 point reduction in order to stave off a pronounced slowdown in the U.S. economy.
Benefiting from the euro's decline and possibly from safe haven flows, the dollar notched gains across the board amid the Federal Reserve Open Committee's recognition that further cuts may be necessary.
Flows from Asia and South America will almost certainly go in favour of the dollar, Reed said.
Sterling was also weaker, struggling to stay on the right side of the 1.43 usd mark in the wake of the euro's drop.
There was little incentive to buy sterling despite the Bank of England's preparedness to cut interest rates again if the slowdown in the global economy warrants it, Steve Pearson, economist at Halifax said.
The yen continued its downward spiral with the lack of political leadership likely to mean that Japan will be unable to put in place the necessary measures to help its economy recover, Reed said. The 140 level to the dollar seems to be beckoning, she said.