* Euro slips, ECB puts policy in neutral
* ECB could still disappoint investors pricing in Oct cut
* Fed easing expectations could hamper dollar (Recasts, adds details, adds comment, updates prices)
NEW YORK, Sept 8 (Reuters) - The euro fell to a two-month low against the dollar on Thursday after European Central Bank President Jean-Claude Trichet highlighted downside risks to the euro zone economy, signaling no rate increases in the near term.
For his comments, click on [ID:nFAT007243].
Investors had already struck a cautious tone on the euro after European Central Bank policymakers had left the benchmark interest rate at 1.5 percent as expected.
Though the bank was seen as likely to change tack from its prior hawkish tone and flag a pause in the recent monetary tightening cycle, the news still prompted swift investor reaction.
A month ago the bank had considered the risks to growth were balanced, Trichet said in a press conference following the rate decision, but that is not the case today. [ID:nFAT007245].
Trichet "is definitely signaling neutrality but in that couching language of maybe accommodative monetary policy, if GDP turns negative," said Boris Schlossberg, director of currency research at GFT in Jersey City, New Jersey. "There is no more tightening in the foreseeable future as the economic data has definitely deteriorated."
The euro dropped 0.6 percent at $1.4008
Money markets are pricing in a chance of a rate cut as
early as October as the debt crisis shows no sign of relenting
and the global economic outlook deteriorates.
Graphic on interest rate expectations http://link.reuters.com/pej23s ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
One analyst expected more from the central bank on dealing with the euro zone peripheral debt crisis. [ID:nF9E7IB01Y].
"Downplaying the situation in the euro zone periphery suggests they are slightly detached from the reality which does not instill much confidence that they have an understanding of the gravity of the situation," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
Data from Greece showed the economy shrank 7.3 percent in the second quarter from a year ago, highlighting the difficulties indebted countries face in trying to reduce their deficits. [ID:nL5E7K80RJ]
The bickering and policy disagreements among the 17 member countries in the euro zone on policies has even given rise to concerns among some investors that the bloc may eventually break up, traders say.
DOLLAR ALSO SEEN VULNERABLE; BOE HOLDS
Sterling turned higher, rising back above $1.60 against the dollar
While expected, traders said the pound gained on short-covering by some market players who had priced in the chance that the central bank may initiate more economic stimulus.
Meanwhile, any enthusiasm for more bearish bets on the euro may be countered by expectations that U.S. Federal Reserve Chairman Ben Bernanke, speaking at 1:30 p.m. ET (1730 GMT), might drop clearer hints on the likelihood of more stimulus later this month. Any hint of more easing could hurt the dollar.
Markets, however, also are speculating that instead the Fed could opt for the so-called 'Operation Twist', in which it sells short maturities and uses the proceeds to buy long-term debt, thus flattening the yield curve but keeping balance sheets unchanged.
The greenback was little changed at 77.264 yen
The dollar was up 1.1 percent against the Swiss franc ay 0.8668 francs, after earlier hitting a 3-1/2 month high of 0.86920 francs
The Swiss franc has been broadly under pressure since Tuesday when the Swiss National Bank imposed a floor on the euro/Swiss franc pair at 1.2000 francs. The euro was last at 1.2142 francs