By Karen Brettell
NEW YORK (Reuters) - The euro fell sharply on Friday after European Central Bank chief Mario Draghi said inflation expectations were declining to levels that were very low, keeping the door open for further monetary easing soon.
The euro fell 1.19 percent to $1.2389 and dropped 1.58 percent against the Japanese yen to 145.89 yen .
"His comments have hit the euro hard," said Niels Christensen, FX strategist at Nordea, adding that euro zone inflation data next week would be a crucial influence on the ECB's thinking.
"Particularly his comments that he is worried about inflation expectations means that the ECB could ease policy soon. If it doesn't buy government bonds, then at least it could announce a decision to buy corporate bonds."
The Australian dollar and other high yielding currencies jumped after China cut benchmark interest rates for the first time in over two years to bolster a sagging economy.
The Aussie, which is often used as a more liquid proxy for Chinese investments, was last up 0.59 percent at $0.8669 , with the rate cut likely to assuage fears of a Chinese slowdown that have hurt commodity currencies.
"They have added significant liquidity to a global system that already has ample liquidity," said Lane Newman, director of foreign exchange at ING Capital Markets in New York.
The U.S. dollar is seen as continuing recent gains as the Federal Reserve is viewed as likely to increase interest rates next year as Europe, Japan and other economies continue very loose monetary policies meant to stimulate growth.
"The Fed will be a much more hawkish central bank relative to other central banks," Newman said.
Earlier, the yen rose after Japanese Finance Minister Taro Aso said the currency's fall over the past week was too rapid, one of the strongest warnings against a weak yen since Japan started its aggressive monetary stimulus in 2012.
The dollar fell to 117.72 from around 118 yen before his comments.
The dollar has climbed almost 10 yen since the Bank of Japan surprisingly eased policy in late October.
(Additional reporting by Anirban Nag in London; Editing by Chizu Nomiyama and Richard Chang)