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Euro falls; dollar set for best month since May

The euro fell on Friday as soft euro zone inflation data rekindled concerns the European Central Bank may have to act to combat deflation, while the dollar strengthened on mildly encouraging data to close out its best month since May.

Nagging worries about emerging market woes spreading underpinned safe-haven buying for the yen.

"The focus on the euro is that we could see a policy response from the ECB next week," said Shaun Osborne, chief foreign exchange strategist at TD Securities in Toronto.

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Euro zone inflation data on Friday showed a surprise drop to 0.7 percent year-on-year in January. Analysts had expected a rise to 0.9 percent.

The fall could be a trigger for further easing by the ECB, which holds its policy review next week, to sustain a fragile recovery and ward off a falling price spiral that could cripple the economy for years.

The euro fell 0.4 percent against the dollar at $1.3502 after touching its lowest level since late November.

The single currency also hit a two-month trough against the yen, last down 0.8 percent against the Japanese currency at 138.11 yen.

The euro is on track to suffer its biggest monthly drop versus the dollar in 11 months and the steepest monthly decline against the yen since July 2012.

(Read more: Will Argentina's woes hit this country?)

Trading volumes were light with large parts of Asia on holiday for the Lunar New Year.

Meanwhile, risk aversion hit commodity-related currencies, with the Canadian dollar falling to a 4-1/2-year low. The loonie last traded at C$1.1176 per dollar in the wake of weaker-than-expected data on Canadian growth in November.


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