FOREX-Euro slips as economy struggles, ECB awaited

* ECB rate cut expectations to keep euro subdued
    * Trading light due to U.S. holiday
    * Aussie retreats after hitting two-month highs
    * Euro falls to 16-month low vs Swedish crown

    By Anirban Nag
    LONDON, July 4 (Reuters) - The euro slipped against the
dollar and the yen on Wednesday as grim economic data
strengthened expectations the European Central Bank is about to
cut interest rates, while growth-linked currencies took a
breather from a recent rally.
    The euro was also lower on bond redemption-related selling,
with some investors on the sidelines given a U.S. market holiday
that kept volumes on the low side, traders said.
    The euro dipped 0.2 percent to $1.2585, still
holding above Tuesday's low of $1.2559. Immediate resistance
loomed at $1.2693, a high reached last Friday after European
leaders hammered out a deal to tackle the region's debt crisis.
    "The market looks primed for a 25 basis point cut by the
ECB, but something more like a liquidity injection would be
needed to lift the euro," said Paul Rob son, currency strategist
at RBS.
    "Investors will also want to see if the ECB President will
highlight downside risks to growth and inflation, which will set
the ground for more easing."
    Pressure on the ECB to ease policy has gathered pace as the
region's economic slowdown has deepened on the back of tight
credit conditions that are providing strong headwinds to growth
amid fiscal tightening and austerity.
    Near-term inflation pressures have also eased following a
sharp drop in energy prices over the last couple of months,
giving extra scope for a rate cut.
    Data on Wednesday showed Germany's services sector
unexpectedly stagnated in June. And while a contraction in
France's services sector eased, business expectations slumped to
their lowest in three years, underlining how bleak conditions in
Europe are.  
    Analysts said that, while a slew of measures to support
growth from the ECB could help the euro, given that investors
have significantly large bearish positions, any disappointment
could see the euro come under fresh pressure and bring the June
28 low of $1.2407 back into focus.

    BOND REDEMPTIONS
    Currency dealers said Japanese investors received principal
on redeemed euro zone bonds which was swiftly converted to yen.
That pushed the euro 0.25 percent lower against the yen to
100.36.
    "Euro/yen and dollar/yen dipped in the morning on bond
redemption flows. Using that opportunity, I sold dollar/yen, but
have since closed my positions in both pairs and I'm taking a
wait-and-see stance ahead of the ECB tomorrow," said a trader
for a major Japanese bank.
    A string of weak data out of the United States and Europe
has spurred expectations of more stimulus from both the ECB and
the Federal Reserve.
    This has encouraged the market to use the euro and U.S.
dollar as funding currencies for carry trades, traders said.
    While easing global monetary conditions should bolster risk
appetite and could lend some support to the euro, it is likely
to underperform the growth-linked currencies as a lower interest
rate would be euro-negative.
    Underscoring that the euro fell to a 4-1/2 month low against
the Australian dollar around A$1.2211.
    The risk-sensitive Aussie was slightly lower against the
U.S. dollar at $1.0262, having reached two-month highs at
$1.0371 on stronger-than-expected Australian retail
sales data.
    The euro also fell against the Swedish crown after the
Riksbank kept interest rates unchanged at 1.5 percent as
expected. Despite risks from the euro zone, it only slightly
trimmed expectations for future base borrowing costs.
 
    The euro fell to a 16-month low of 8.7090 crowns
from around 8.7450 before the rate decision was announced.