Dollar jumps as ECB rate cut looms
Weak economic reports from eurozone boost likelihood that central bank will act this week.
NEW YORK (CNNMoney.com) -- The dollar rose sharply against the euro Wednesday, after weak economic reports from Europe supported many investors' belief that the European Central Bank will cut interest rates this week.
The euro, the currency of 16 nations, stood at $1.2868, down 1.3% from Tuesday's close of $1.3040.
A report from Eurostat, the European Union's statistical agency, showed December's retail sales in the region fell 1.6% from a year ago. Weak consumer spending has helped derail the European economy, which has been in a recession since the second quarter of 2008.
As a result, some economists believe the European Central Bank will again cut its key interest rate - now standing at 2% - on Thursday, despite earlier hints from the ECB that the central bank would hold rates steady for some time.
The Russian factor: Also supporting the dollar was Fitch Ratings' downgrade of Russia's long-term currency ratings to "BBB" from "BBB+," according to Neil Mellor, currency strategist at Bank of New York Mellon in London.
The downgrade pressured the euro, as Russia will likely be forced to sell off euros to balance its portfolio of currencies. Russia, like many foreign countries, had sold dollars in exchange for its local currency - the ruble - which resulted in a net rise in euros in proportion to its reserve ratios.
"A number of central banks had been selling dollars, but now you're seeing the reverse: central banks are selling euros to re-weight their portfolios," said Mellor. "The problem is, if you've got two awful currencies, you can't sell them against each other."
British pound: The dollar fell slightly against the British pound after a report showed the U.K. service sector industry declined less than expected in December, even though companies cut jobs at a record pace during the month.
The pound rose to $1.448, up 0.2% from Tuesday's close of $1.4459.
Limiting any advance is the fact that many economists believe the Bank of England will cut interest rates to a record low of 1% from 1.5% at its meeting on Thursday.
Still, some analysts believe traders' reaction to the rate cuts has been more muted than in normal market conditions.
"The marginal reaction to rate cuts is worrying," said Neil Mellor, currency strategist at Bank of New York Mellon in London. "Rate cuts are having a decreasing impact, as central banks' measures are becoming more radical and more common."
Japanese yen: The dollar rose against the yen Wednesday after a report showed the U.S. services sector shrank less severely than expected in January.
The dollar rose to ¥89.68, up 0.3% from Tuesday's close of ¥89.43. 
