LONDON: The euro fell more than half a percent on Wednesday after a report suggesting the European Central Bank, rather than swinging decisively towards a tighter monetary stance this week, is preparing to cut its outlook for inflation.
The single currency had recovered almost 10 percent against the dollar in the past five months, benefiting from broad greenback weakness but also on the view that rising inflation would prompt the ECB to raise interest rates in early 2018.
But with global inflation pressures waning, and with euro zone data coming in weaker in recent data releases, that view has started to shift, and the ECB is not expected to signal a change in policy at its meeting this week.
Bloomberg, citing unnamed euro zone officials, said the central bank's staff forecasts for inflation for the next three years had been cut to 1.5 percent, from 1.7 percent, 1.6 percent and 1.7 percent, respectively in March.
Those have still to be approved by the two-day meeting of the Governing Council that starts on Wednesday, the news agency said, but, if true, would be a signal of a softer line than many in currency and bond markets have been expecting.
The ECB declined to comment on the report.
"If you downgrade your inflation forecasts the next year you're basically sending a message to the market - 'We're not in any rush'," CMC Markets' chief markets analyst, Michael Hewson, said.
"The ECB doesn't want a strong euro so what better way of pushing it back down against a weakening dollar and pulling the rug out from any potential hawkishness at tomorrow's meeting. They've basically lowered expectations."
By 1155 GMT, the euro had fallen 0.6 percent to $1.1215 and 122.72 yen respectively. It was similarly weaker at 86.88 pence per pound.
The dollar rates compare with a seven-month high of $1.1285 hit last week.
The moves also came as the dollar recovered some of this week's more than 1 percent loss against the yen, due largely to broad nerves over the pace of US growth and government policy that have cut US Treasury yields to the lowest since November.
Traders remain cautious before Thursday's UK election, which some worry may be far closer than some polls indicate, as well as the US Senate testimony of James Comey, the former FBI chief sacked by President Trump.
The greenback fell as low as 109.115 yen, its weakest since April 21, before recovering to stand flat on the day at 109.49 yen.
"Tomorrow's what is being dubbed as 'Triple Threat Thursday'...an event-filled day that could send global markets on a bumpy ride," ING currency strategist Viraj Patel wrote in a note to clients.
Any damaging revelations in Comey's testimony is likely to further hurt Trump and take the wind out of his plans to roll back regulations and overhauling the tax system - an agenda that sent the dollar to 14-year highs this year.
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