FOREX-Euro steadies after ECB officials clarify monetary policy stance

Tue Mar 25, 2014 10:56pm EDT

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By Shinichi Saoshiro

TOKYO, March 26 (Reuters) - The euro steadied on Wednesday, bouncing off lows after comments from European Central Bank officials helped temper dovish comments made against the background of the currency's recent bullishness.

The single currency hit a three-week low on Tuesday after ECB governing council member and Bundesbank chief Jens Weidmann said negative interest rates were an option to temper euro strength and that quantitative easing was not out of the question to combat deflation.

But the euro, which had reached a 2-1/2-year peak against the dollar mid-March on diminished ECB easing expectations, recovered when Weidmann later said the current euro rate does not call for monetary policy action.

Market watchers said comments by ECB President Mario Draghi that the central bank does not see a key symptom of deflation in consumer spending traits also gave the euro some relief.

The euro stood little changed at $1.3818, pulling back from the three-week trough of $1.3749 hit on Tuesday.

"The euro moved suddenly and widely after the dovish comments regarding ECB policy, and this likely helped trigger short-covering that prompted the bounce off lows," said Shinichiro Kadota, chief Japan forex strategist at Barclays in Tokyo.

The U.S. dollar index, which measures the dollar against six major currencies, was last up 0.1 percent at 79.985.

The dollar index has found little follow-through momentum from last week when it rose to a three-week high above 80.35 after new Federal Reserve chair Janet Yellen suggested the possibility of raising interest rates early next year.

Similarly, the greenback couldn't make much headway after data on Tuesday showed U.S. consumer confidence surging to a six-year high in March.

"Monetary policy is becoming the dominant theme in the dollar market. Unless the indicator has direct bearings on monetary policy, like employment or inflation, the market's sensitivity to such data is becoming lower," said Kadota at Barclays.

Against the yen, the dollar edged up 0.1 percent to 102.38 , edging further away from this month's low of 101.205 reached when safe-haven bids driven by the Ukraine crisis supported the Japanese currency along with the Swiss franc.

The yen has been hemmed in a relatively tight range between 102.01 and 102.65 against the dollar this week, with traders attributing its inertia to dwindling participation from Japanese investors, many of whom are suspected of having closed their books before the completion of the domestic fiscal year at the end of the month.

"There are few incentives or events left that can knock the yen out of its current range, and focus has already turned to the U.S. nonfarm payrolls next week," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust in Tokyo.

"The nonfarm payrolls might be the only predictable factor with enough clout to break the deadlock," Sera said.

The Australian dollar traded at $0.9162, near a four-month high of $0.9178 hit on Tuesday.

Speculation that China will unveil stimulus measures to re-energise its slowing economy has helped the New Zealand dollar and Aussie, often used as a proxy for exposure to growth cycles in China, Australia's key export market.

The market was keeping an eye on Reserve Bank of Australia Governor Glenn Stevens, due to speak in Hong Kong at 0330 GMT.

Recent Aussie strength could trigger a fresh round of jawboning that the currency is too high, though RBA officials have been noticeably less aggressive in their comments recently. (Editing by Shri Navaratnam and Eric Meijer)

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