FOREX-Euro struggles after ECB officials reopen easing debate; yen firmer

Wed Mar 26, 2014 11:11pm EDT

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By Hideyuki Sano and Masayuki Kitano

TOKYO/SINGAPORE, March 27 (Reuters) - The euro held steady near recent lows versus the dollar on Thursday after comments from European Central Bank officials revived speculation about further monetary easing to stave off potential deflation.

The euro traded at around $1.3784, hovering near a low of $1.3749 hit twice in recent days, a break of which will bring the currency to its lowest level since March 6.

That was the day when currency posted its biggest jump in the past two months as the ECB refrained from taking any easing steps. The euro's rally went on to a 2 1/2-year high of $1.3967 hit a week later.

But speculation of more stimulus was rekindled after influential ECB governing council member and Bundesbank chief Jens Weidmann said on Tuesday that the central bank could exercise several options to temper euro strength and combat deflation.

Weidmann said negative interest rates were an option and quantitative easing was not out of the question -- surprising investors given the German central bank has consistently viewed quantitative easing critically.

ECB President Mario Draghi also said on the same day that the central bank stood ready to act if inflation slipped lower than the ECB expected.

The comments put fresh focus on euro zone consumer price data due on Monday, which economists expect to show subdued inflation of 0.7 percent, below the ECB's annual inflation forecast of 1 percent this year.

"It seems the ECB is concerned about disinflation a bit more than the market had been led to believe. The ECB seems to be trying to adjust market expectations as the euro has gained," said Shin Kadota, chief FX strategist at Barclays.

The euro hit two-week low against sterling in early trade, falling to 0.8311 pound.

Against the yen, the single currency touched a three-week low of 140.28 yen on trading platform EBS, falling back to levels seen before this month's ECB policy meeting.

The euro last fetched 140.40 yen, down 0.2 percent from late U.S. trade on Wednesday.

YEN EDGES HIGHER

The yen touched a one-week high of 101.71 yen against the dollar earlier on Thursday, drawing some support from renewed concerns over Ukraine after U.S. President Barack Obama's tough talk on Russia on Wednesday as well as some soft spots in U.S. durable goods orders data.

While there was some focus on the potential for Japanese fund repatriation ahead of Japan's financial year-end at the end of March, some traders played down that notion.

The dollar ran into long liquidation in the wake of its failure to rise above 102.50 yen on Wednesday, said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.

"Some downside stops were triggered following the risk-off type of move we saw yesterday," he said, adding that there had been some stop-loss dollar offers at levels below 101.80 yen.

The dollar last traded near 101.87 yen, down 0.2 percent on the day.

The Australian dollar stayed firm near a four-month high on hopes of economic stimulus in China and upbeat comments on the economy from Reserve bank of Australia Governor Glenn Stevens on Wednesday.

The Aussie edged up 0.1 percent to $0.9237, not far from Wednesday's high of $0.9245.

Although Stevens said he expects the Aussie to weaken, he noted signs that low interest rates were working to stimulate demand, and a further period of steady policy was likely. (Additional reporting by Masayuki Kitano in Singapore; Editing by Kim Coghill)

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