The euro fell to a two-month low against the dollar on Thursday after the European Central Bank signalled a pause in its interest-rate tightening cycle that began just five months ago. The euro area economy is subject to "intensified downside risks," ECB President Jean-Claude Trichet said in a press conference after the ECB left rates at 1.5 percent, marking a significant change in stance from last month when the bank was focused on inflation risks.
Trichet's comments had pushed the euro down more than 1 percent against the dollar. Losses deepened after Federal Reserve Chairman Ben Bernanke offered no details of potential easing measures to boost a flagging US economy, which encouraged some dollar bulls.
"We haven't heard anything that moves the debate about (a third round of quantitative easing) forward. So in that respect, there's perhaps a diminished chance that we will see any Fed action at this month's policy meeting," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
The euro fell as low as $1.38750 on trading platform EBS, its lowest since July 12, with losses accelerating after breaching support near $1.3900 - the 50 percent Fibonacci retracement of its low to high this year. It last traded at $1.3885, down 1.5 percent on the day. The euro also lost 1.4 percent against the British pound to 86.97 pence.
Money markets are pricing in a chance of a rate cut by the ECB as early as October as the European debt crisis shows no sign of relenting and the global economic outlook deteriorates. A close below its 200-day moving average, currently around $1.4023, should signal further declines in the euro/dollar, traders said. The pair broke and closed below this level on Tuesday. The next key downside target lies at $1.38376 on EBS, the euro's low set on July 12.
Sterling slipped 0.2 percent to $1.5966, after earlier rising above $1.60 after the Bank of England kept interest rates at 0.5 percent and made no changes to its asset-purchasing program. Against the yen, the dollar rose 0.3 percent to 77.46. Selling by Japanese exporters was seen capping the pair around 77.50 yen. The dollar rallied 2 percent to 0.8749 Swiss franc, after hitting a 3-1/2-month high of 0.87704 franc on EBS. The franc has been under pressure after the Swiss National Bank on Tuesday imposed a floor on euro/Swiss franc at 1.2000. The euro rose 0.4 percent to 1.2145 francs. Against a basket of currencies, the dollar index jumped 1 percent to 76.246.
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