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Euro weakens to lowest in 11 years on diverging economic growth

[NEW YORK] The euro slid to the weakest level versus the dollar since 2003 as economic reports from Europe and the US highlighted a growing divergence in growth outlook.

The 19-nation currency fell for a fifth day before a European Central Bank policy meeting on Thursday, as services growth in the euro area fell short of analysts' estimates. A gauge of the dollar advanced as a private report showed US companies added more than 200,000 jobs for a 13th straight month in February, and January's gains were revised higher.

"That's mildly positive," Daniel Brehon, a New York-based strategist at Deutsche Bank AG, said in a phone interview. "The whole point of looking at this kind of data is to see what the Federal Reserve is going to be thinking about in March."

The euro dropped 0.8 per cent to $1.1083 per euro at 10 am New York time, the weakest level since September 2003. The dollar was little changed at 119.74 yen.

The Bloomberg Dollar Spot Index rose 0.4 per cent top 1,179.18, on track for its highest close in more than 10 years.

US economic reports are being scrutinized by traders and policy makers alike as the Fed moves toward raising borrowing costs for the first time since 2006. The central bank will look at data to inform its decision on the timing of any interest- rate increase, Chair Janet Yellen told Congress last week.

The odds of a higher rate by the Fed's December meeting were about 77 per cent, according to futures data, versus a 63 per cent chance that was seen at the end of January. The target for the federal funds rate has been at virtually zero since 2008 to support the economic recovery.

US companies added 212,000 jobs in February, versus 219,000 forecast in a Bloomberg survey before the today's release by Roseland, New Jersey-based ADP Research Institute. The Bloomberg dollar index briefly pared gains after January's ADP figure was increased to 250,000, from 213,000.

In the euro region, a purchasing managers' index for services industries was 53.7 in February, compared with the 53.9 estimate, Markit Economics confirmed. Earlier releases showed the sector in Spain grew at a slower pace than predicted. Italy's was at the 50 level that marks the difference between contraction and expansion, and compared with the median prediction of 51.4.

As the Fed moves toward cutting interest rates, Europe is preparing to inject further monetary stimulus into the economy, fueling a spate of central-bank easing around the world.

Poland became the latest central bank to lower interest rates on Wednesday, cutting its benchmark seven-day reference rate by a half-per centage point to 1.5 per cent. India earlier reduced its key rate for the second time this year in an unscheduled move.

ECB President Mario Draghi unveiled a 1.1 trillion-euro bond-buying plan in January, pledging to buy securities until there's a "sustained adjustment" in inflation. Officials may give further details of the quantitative-easing program at their Thursday meeting.

"It's worth noting that the market may want to increase their short-euro exposure ahead of the ECB actually starting their QE program," said Sam Lynton-Brown, a currency strategist at BNP Paribas SA in London. "While the announcement led to euro weakness, we also think the flow impact of QE is going to be very important." A short position is a bet that the price of an asset will decrease.


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