* Euro drops on QE comments from Bundesbank's Weidmann
* Dollar index firm but struggles to gain traction
* Latest US data fails to back up last week's dollar rally
(Recasts, adds comments)
By Anirban Nag
LONDON, March 25 The euro fell broadly on
Tuesday, after European Central Bank governing council member
and Bundesbank chief Jens Weidmann said negative interest rates
were an option the bank could use to counter strong gains in the
Weidmann also said it was not out of the question for the
ECB to buy assets from banks to fight deflation, marking a
radical softening of the German central bank's strict stance on
The euro fell 0.2 percent to trade at $1.3808, having
rallied on Monday on talk that a large sovereign investor may
have bought the single currency as part of a reserve management
exercise. Other traders attributed the gains to German companies
repatriating profits from overseas.
It was also weaker against the yen and the
British pound, though against a trade-weighted
basket of currencies it remained still close to 2-1/2 year highs
Weidmann's comments on sub-zero borrowing costs referred to
negative deposit rates, which would mean that banks would have
to pay to park their funds at the ECB overnight.
That would make it unattractive to hold euros while making
the currency more liable to be used as a funding currency for
investments in higher-yielding assets, depressing its value,
Governing Council member Erkki Liikanen said on Monday the
ECB was keeping a close eye on the euro to see how the exchange
rate affected inflation, while European Commission
vice-president for industry Antonio Tajani said on Tuesday that
at $1.40 the euro was too strong.
"All the comments are a pre-emptive move by ECB officials to
prevent a rapid appreciation beyond $1.40," said Ian Gunner,
portfolio manager at Altana Hard Currency Fund. "It suggests
that they are concerned about the euro but there is no consensus
about future policy action."
Earlier in the day, the euro rose after mixed German data.
The German Ifo business morale index fell for the first time
in five months in March, as expected, but current conditions
sentiment edged higher, giving investors who had positioned for
a weak set of readings an excuse to buy the euro.
"The Ifo survey was disappointing but only slightly," said
Peter Kinsella, currency strategist at Commerzbank. "Business
conditions remain robust, pointing to decent growth and a
pick-up in wages. Typically the euro would have dropped if it
was a very weak Ifo number. But it hasn't."
DOLLAR NEEDS DATA BOOST
The dollar index rose 0.1 percent to 80.065, having
slipped the previous day in the wake of a disappointing reading
on U.S. manufacturing activity.
It inched up after Philadelphia Federal Reserve President
Charles Plosser told CNBC that Fed Chair Janet Yellen has not
made a mistake about the timing of signals on possible rate
Investors had bought the dollar last week after Yellen
suggested the possibility of raising interest rates early next
year. But traders said the rally would not be extended unless it
was supported by strong U.S. economic data.
Recent data has not been convincing enough despite offering
hope that the world's biggest economy was picking up momentum
after a weather-induced slowdown.
Later on Tuesday, the dollar could take fresh cues from a
batch of U.S. economic data, including readings on consumer
confidence and new home sales.
Against the yen, the dollar was steady at 102.30 yen,
but stayed below Monday's high of 102.65 yen.
Meanwhile, the Chinese yuan consolidated gains against the
dollar, a day after posting its biggest rise in nearly 30 months
on speculation the Chinese government would unveil stimulus
measures to support the economy.
(Editing by Susan Fenton, John Stonestreet)