Euro slips as bets on deeper negative rates in ECB grow

By Anirban Nag

LONDON (Reuters) - The euro hovered near seven-month lows against the dollar and lost ground against the yen on Thursday as investors bet against it, expecting the European Central Bank to ease monetary policy again next week.

In the United States, investors squared positions on Wednesday before the Thanksgiving holiday. Few are likely to be active on Friday, keeping volumes low and ranges tight going into the weekend.

Nevertheless, the gap between yields on two-year U.S. and German government debt reached its widest since November 2006, reflecting the diverging monetary policy outlooks of the Federal Reserve and the ECB and making the dollar more attractive to investors.

Overnight bank-to-bank Eonia lending rates dated for the ECB's Dec. 3 meeting fell below minus 0.28 percent, reflecting expectations the bank could cut the deposit rate as low as minus 0.35 percent, from the current minus 0.20 percent.

The euro was down 0.1 percent at $1.0615 , having skidded on Wednesday to $1.0565 , its lowest since mid-April, before recovering. Against the yen, it was trading 0.1 percent lower at 130.15 yen, not far from a seven-month low of 129.77 hit on Wednesday.

The euro's slide picked up pace after ECB officials told Reuters they were considering options such as whether to stagger charges on banks hoarding cash or to buy more debt.

The central bank meets next week and most in the market expect it to increase its asset purchase program and lower its deposit rate, the rate at which banks park excess funds with it.

"The market's hope for a deeper deposit rate cut have got a lift after the Reuters report. It is very difficult to buy the euro ahead of the ECB meeting next week. So downside risks for the euro falling below $1.05 are rising," said Yujiro Goto, currency analyst at Nomura.

The dollar was also being bolstered by expectations of a rate increase in December. Investors are pricing in more than a 70 percent chance rates will rise for the first time in almost a decade.

The dollar index <.DXY> was higher at 99.831 after reaching an 8 1/2-month high of 100.170, after strong U.S. manufacturing output and business investment plan numbers on Wednesday reinforced the case for a rate increase.

"Short euro/long dollar bets are one of the most direct ways to position for monetary policy divergence," Goldman Sachs said in a note. "Our 12-month forecast for euro remains $0.95, but we think the odds are that this level is reached sooner given the potential for the ECB to ease aggressively in December."

(Editing by Larry King)

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