Forex - EUR/JPY drops on report ECB mulling negative rates

The euro fell from 4-year highs against the yen on Wednesday amid reports the European Central Bank is mulling the use of negative interest rates to ward off possible deflationary pressures.

In U.S. trading on Wednesday, EUR/JPY was down 0.73% at 134.57, up from a low of 134.42 and off a high of 135.94.

The pair sought to test support at 132.21, the low from Nov. 11, and resistance at 135.94,  the earlier high.

The euro weakened after Bloomberg reported that sources close to the ECB said the bank is to weigh a -0.1% deposit rate if more easing is required.

The ECB surprised investors after it unexpectedly cut rates to a record low 0.25% earlier this month amid concerns over mounting deflationary pressures in the euro area.

The euro firmed to 4-year highs on Tuesday after European Central Bank board member Joerg Asmussen warned that monetary authorities must be “very careful” when considering the use of negative interest rates to steer the economy away from low inflation rates.

The euro also softened against the yen and other safe-haven assets as investors eagerly awaited the release of the minutes from the Fed's October policy meeting later in the day.

Fed Chairman Ben Bernanke on Tuesday reiterated the bank’s commitment to highly accommodative monetary policy on Tuesday and said the Fed would only taper its USD85 billion-a-month asset purchase program when it was assured of a sustained recovery in the labor market.

Interest rates will probably remain near zero for a “considerable time” after the bank winds up the stimulus program, he added.

The euro, meanwhile, was down against the pound and down against the U.S. dollar, with EUR/GBP trading down 0.78% at 0.8332 andEUR/USD trading down 0.74% at 1.3438.

On Thursday, the euro zone is to release preliminary data on manufacturing and service-sector activity.