Euro falls to nine year low; Greece and ECB in focus

LONDON (Reuters) - The euro hit a near nine-year low on Monday as markets bet the prospect of inflation across the region turning negative and political uncertainty in Greece will force the European Central Bank to launch quantitative easing.

European shares were under pressure after the Athens bourse slumped again and, amid yet another hefty slide in oil prices,

Wall Street was expected to open lower too .

The euro fell as low $1.18605 overnight, its weakest level since March 2006, and was struggling at $1.1895 as U.S. trading began to gather momentum. [FRX/]

Investors taking a punt that the ECB will open up a bond-buying program as the U.S., UK and Japanese central banks have done were emboldened by an interview with ECB president Mario Draghi in German paper Handelsblatt on Friday.

He said the risk of the central bank not fulfilling its mandate of preserving price stability was higher now than half a year ago.

German regional inflation figures saw more weakness in December, adding to the downward pressure on the euro and government bond yields before Wednesday's euro zone estimate.

Economists forecast that euro zone consumer prices fell 0.1 percent in December, the first decline since 2009 . That should fan expectations the ECB will ease at its first policy meeting of the year on Jan. 22.

Greek politics were also at the forefront of market thinking as the debate around the possibility of elections later this month resulting in the country leaving the euro zone picked up again.

Germany still favors stabilizing the euro zone without losing any of its members, government wants Greece to stay in the euro zone, Chancellor Angela Merkel's spokesman said on Monday, responding to a media report that Berlin believes the bloc could cope without Greece.

"Wednesday's inflation data might determine the extent of the ECB's action," said Gary Jenkins, chief credit strategist at LNG Capital.

"Confucius said it was good to live in interesting times, although Mr Draghi might well be thinking 'yes but not quite this interesting.'

DIVERGENCE

The dollar <.DXY> rose broadly, extending its recent bull run to a nine-year high as markets wagered a relatively healthy U.S. economy will lead the Federal Reserve to raise rates in the middle of this year.

Although it will start slowly, there is a heavy calendar of U.S. data this week including PMIs, retail figures and car sales , all expected to show a strengthening of the economy.

Europe, in contrast, remains in a far more fragile state as it battles the prospect of euro zone deflation and the threat of Britain leaving the European Union.

The region's FTSEuroFirst 300 index of leading shares was down 0.4 percent <.FTEU3> as Britain's FTSE <.FTSE>, France's CAC40 <.FCHI> and Germany's DAX <.GDAX> lost 0.5-0.7 percent. Greece's stock market <.ATG> slumped 4 percent to take its losses since March to over 40 percent.

Overnight, Asian shares excluding Japan fell 0.8 percent <.MIAPJ0000PUS> and Japan's Nikkei dipped 0.25 percent <.N225>, although Chinese shares <.SSEC> maintained their hot streak with a fresh 5-1/2 year high.

The political and monetary policy uncertainty in Europe helped support major government bond markets. Euro zone yields were anchored near record lows with Germany's 10-year yield at 0.5 percent , and equivalent U.S. Treasury yields were steady at 2.12 percent .

Greece's bonds were in the firing line again, however, as 10-year yields rose 21 basis points to 9.46 percent and 3-year ones climbed further above 12 percent. [GVD/EUR]

OIL SLIP

Oil prices, whose decline of more than 50 percent from peaks hit in June rattled many energy producers, hit a fresh 5-1/2-year low as global growth concerns fanned fears of a supply glut.

Brent crude futures were at $54.60 and still dropping at 1300 GMT (0800 ET), their lowest since May 2009. [O/R]

"Oil demand is unlikely to be robust this year when we look at the state of economies in China, Japan and Europe," said Yusuke Seta, a commodity sales manager at Newedge Japan.

Saudi <.TASI> and Nigerian <.NGSEINDEX> stocks took another tumble in the wake of the further slip in oil and there was also more volatility for Russian and former Soviet markets.

Just days after Turkmenistan devalued its currency to try and stay competitive with the battered Russian rouble, Belarus said it was doing the same as it cut its rouble by 7 percent.

(Additional reporting by Marc Jones; Editing by Andrew Heavens and John Stonestreet; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)

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