The euro fell to its lowest in nearly a year against a firmer dollar on Monday after the head of the European Central Bank said he was prepared to take action if inflation dropped further, raising expectations of quantitative easing.
Traders said the euro could come under more selling pressure if a key German business survey falls short of expectations. The German IFO survey, due at 0800 GMT, is forecast to read 107 for its business climate index, down from its July reading of 108, as a conflict between Russia and Ukraine takes its toll on Europe's biggest economy.
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The euro skidded to $1.3185 EUR= in early Asian trade, its lowest since September 2013, from around $1.3246 late in New York on Friday. It was last trading at $1.3190, down about 0.3 percent on the day, amid lower than usual volumes due to a holiday in London.
The euro's woes lifted the dollar index .DXY 0.3 percent to 82.564, heading towards its Sept. 5 peak of 82.671. A break above that would take it to levels not seen since July 2013.
In stronger language than he has used in the past, ECB President Mario Draghi said on Friday the central bank was prepared to respond with all its "available" tools should inflation drop further.
The ECB holds its next policy review on Sept 4.
"The FX market has interpreted Draghi's statement as meaning that broad-based asset purchases, or quantitative easing, has now become more likely," said Lutz Karpowitz, currency strategist at Commerzbank.
"Euro/dollar has already slipped below the $1.32 level."
Investors will scan euro zone inflation data due on Friday. Analysts polled by Reuters expect annual inflation to have slowed to 0.3 percent in August from 0.4 percent in July. That is well below the ECB's danger zone of 1.0 percent and its target of just under 2.0 percent.
In contrast, Federal Reserve Chair Janet Yellen on Friday gave a nod to the concerns of some Fed officials about the sustained level of monetary policy stimulus, even as she stressed the need to move cautiously on raising rates.
"Some people expected more dovish comments from Yellen, but it wasn't a big change," said Kaneo Ogino, director at Global-info Co in Tokyo, a foreign exchange research firm.
As a result, Fed funds futures fell back <0#FF:> as the market priced in the risk of an earlier move on rates. Yields on two-year Treasury paper US2YT=RR climbed over 8 basis points for the week, the largest such rise since June last year.
That helped the dollar outperform, rising to a seven-month high against the yen at 104.49JPY= on Monday morning before pulling back slightly to stand at 104.20 yen, still up 0.2 percent on the day.
Even before its latest jump, the dollar had increasingly attracted bulls. Speculators boosted bullish bets on the greenback in the latest week to their highest in more than two years, according to data from the Commodity Futures Trading Commission released on Friday.
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