FOREX-Euro on defensive after dovish ECB talk, kiwi flies

Thu Mar 27, 2014 10:55pm EDT

Related Topics

* Euro pressured by ECB speculation

* Kiwi among the best performers, hits 2-1/2 year highs vs USD

* Euro zone inflation data next in focus (Adds extra quotes, details)

By Ian Chua and Shinichi Saoshiro

SYDNEY/TOKYO, March 28 (Reuters) - The euro struggled near a three-week low against the dollar on Friday, weighed by recent dovish talk from several European Central Bank (ECB) officials.

Buoyed by monetary tightening expectations, the New Zealand dollar continued its bull run, hitting a 2-1/2-year high against the greenback and a six-year peak versus the yen.

The euro last traded at $1.3744, having plumbed three-week lows of $1.3728 overnight, on track to end lower for a second straight week.

Against the yen, the common currency stood at 140.41 yen after slipping to three-week lows of 140.19.

The euro has sagged since comments this week for more ECB action came surprisingly from Germany, whose policymakers have repeatedly voiced concerns about unorthodox monetary easing.

ECB Governing Council member and Bundesbank chief Jens Weidmann said negative interest rates were an option to temper euro strength and buying loans and other assets from banks to support the bloc was not out of the question.

Peripheral European government bond yields hit a multi-year trough on Thursday while the premium that U.S. two-year debt pays over German paper widened to the most since late 2012.

Traders said inflation data out of the euro zone due later on Friday and on Monday will be closely watched.

"ECB policymakers have consistently signalled openness to easing if certain conditions are met. Further slowing in inflation, contrary to ECB's projections, would help build the case for further easing, even if a move at the April meeting remains rather unlikely," analysts at BNP Paribas wrote in a note to clients.

"Our positioning analysis also suggests that markets remain slightly long EUR on the net basis, offering plenty of scope for rebuilding short EUR and long USD positions."

An overwhelming majority of economists polled by Reuters expect no imminent rate move at the April 3 meeting. Only two of 72 economists predicted a rate cut, versus 26 of 78 who did before last month's meeting.

In contrast, the Federal Reserve has already started to wind back its bond-buying stimulus and last week new Fed Chair Janet Yellen suggested the possibility of raising rates early next year if the economy continued to recover as expected.

The dollar traded little changed at 102.15 yen. The greenback has hovered mostly above 102 yen, lifted from this month's trough of 101.205 yen following Yellen's comments.

The yen showed limited reaction to data that showed Japan's core consumer prices rising 1.3 percent in February from a year earlier, posting a ninth straight month of gains and hinting that the economy is making some progress to overcome 15 years of deflation.

Japan's CPI is expected to gather more attention after the country raises its consumption tax in April, which may cool consumer spending and raise speculation of further monetary easing by the Bank of Japan.

KIWI ON FIRE

Well ahead of every other developed country in normalising policy is New Zealand, which this month lifted interest rates from a record low and flagged more tightening.

Unsurprisingly, the kiwi has been among the strongest performers in recent months. It rose as far as $0.8697 a high not seen since August 2011.

The New Zealand dollar received a fresh boost on Thursday after New Zealand posted a NZ$818 million ($709.4 million) surplus in February, its biggest trade surplus since April 2011.

Against the yen, the kiwi hit a six-year high of 88.86 .

Its dollar-bloc counterparts also gained, with the Australian dollar rising to a four-month high of $0.9296 , while the Canadian dollar climbed to a three-week high of C$1.1013 per USD.

The Aussie got a shot in the arm when markets interpreted comments by Reserve Bank of Australia Governor Glenn Stevens this week about the local economy as bullish.

"The RBA governor did not necessarily hint that a strong Australian dollar was permissible, but the market focused on the fact that he did not strengthen his verbal stance against the currency appreciating," said Masafumi Yamamoto, chief strategist at Praevidentia Strategy in Tokyo.

"A key factor for the Australian dollar still remains RBA monetary policy rather than hopes for economic stimulus in China," he said.

The Aussie is often used as proxy for exposure to growth cycles in China, Australia's key export market. ($1 = 1.1531 New Zealand Dollars) (Editing by Shri Navaratnam and Eric Meijer)

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