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NEW YORK: The dollar held firm Tuesday as the euro took a beating after news of tumbling eurozone inflation raised expectations that the European Central Bank will slash interest rates next week.
At 2200 GMT, the European single currency dropped to 1.3531 dollars from 1.3632 dollars in New York late on Monday.
Against the Japanese unit, the dollar climbed to 93.65 yen from 93.34 yen on Monday.
Inflation in the euro countries slumped in December to 1.6 per cent - the lowest in over two years - from 2.1 per cent in November, according to an estimate on Tuesday from EU's Eurostat data agency.
The drop brought eurozone inflation to the lowest level since October 2006 and clears the way for further interest rate cuts from the European Central Bank (ECB), according to analysts.
The ECB, known as the guardian of the euro, meets next week and is widely expected to deliver another steep interest rate cut on January 15 in a bid to fight recession in the 27-nation eurozone economy.
"December's further sharp drop in eurozone inflation... supports our view that the ECB will reduce interest rates to zero this year," said Capital Economics analyst Ben May in London.
Lower interest rates dampen currencies because they make them a less attractive investment in terms of yields.
The ECB strives to keep annual inflation close to but less than 2.0 per cent, but the rate has not been below that level since August 2007 amid an oil and commodities prices boom, which has deflated over the last six months.
After hitting a record high of 4.0 percent in June and July, eurozone inflation has fallen sharply as oil and other commodity prices collapsed in the face of a deep economic downturn.
Sue Voigtsberger at PNC Bank said the dollar was gaining on expectations that the US economy could emerge from the global recession before the other major economies.
The greenback was helped by "speculation that President-elect (Barack) Obama's fiscal stimulus will provide enough impetus for the US economy to recover from its current recession," she said.
"As the problems in the US were in the forefront of the global financial collapse in 2008, it is likely that they will emerge out of the recession first amongst its major trading partners."
In late New York trade, the dollar stood at 1.1142 Swiss francs from 1.1086 Monday.
The pound bucked the trend, rising to 1.4914 dollars after 1.4699.
- AFP/yb
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