* Euro seen trading between $1.3750 to $1.3880 range
* ECB's Weidmann hints at negative rates, QE
* Aussie trades near 4-month high on China stimulus hopes
By Anirban Nag
LONDON, March 26 The euro fell on Wednesday,
with investors wary after European Central Bank officials ramped
up efforts to talk down the currency, with arguably its most
hawkish member hinting at a radical softening of monetary
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. He added that quantitative easing was not out of the
question to combat deflation.
The euro, which had reached a 2-1/2-year peak against the
dollar in mid-March on fading expectations of more ECB easing,
was trading just above those three-week lows on Wednesday.
The ECB holds a policy meeting next week but before that
traders will await euro zone "flash" inflation data on Monday.
Another drop in price pressures could bolster expectations that
the ECB may have to act soon.
The euro recovered slightly on Tuesday after Weidmann later
said current levels does not call for monetary policy action.
Traders said comments by ECB President Mario Draghi, who said
the central bank does not see a key symptom of deflation in
consumer spending traits, also helped.
Nevertheless, the fact that the Bundesbank was open to
buying assets from banks to fight deflation marked an
unprecedented softening of the German central bank's strict
stance on quantitative easing. That was enough to keep investors
away from the euro for now.
The euro was trading lower for its second straight day at
$1.3800, not far from the three-week trough of $1.3749
hit on Tuesday. It was also lower against the yen at 141.25
"The ECB will be dogmatic about trying to talk down the
euro. But unless these words are followed up by action we will
not see the euro falling much," said Jeremy Stretch, head of
currency strategy at CIBC World Markets.
"The euro has good support around $1.3750, while many will
look to sell it at $1.3880 (the high struck earlier this week)."
A growing number of officials have stepped up their rhetoric
against a firmer euro as it lowers imported inflation and keeps
the risk of deflation alive in the euro zone.
ECB Governing Council member Erkki Liikanen said on Monday
the bank 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.
Slovakia's central bank governor, Jozef Makuch, who also
sits on the ECB board, said the currency should weaken by the
end of the year.
With the euro falling, the U.S. dollar index, which
measures the dollar against six major currencies, was up 0.15
percent at 80.051.
Analysts said as diverging monetary policy outlooks become a
dominant theme in currency markets, the dollar index could
outperform in the second quarter. The U.S. two-year bond
yield premium over Germany hit a 15-month
high on Wednesday.
Westpac's Richard Franulovich said in a note that the dollar
index could rise towards 82 in the second quarter.
"Data momentum appears to be tentatively shifting back in
the dollar's favour, at least against the majors, euro/dollar
valuation vis-a-vis interest rate differentials is hitting up
against unsustainable extremes," it said.
Against the yen, the dollar was firmer at 102.35. The
yen has been hemmed in a tight range between 102.01 and 102.65,
with traders attributing its inertia to dwindling participation
from Japanese investors, many of whom may have closed their
books before the end of the Japanese fiscal year this month.
The Australian dollar traded at $0.9217, a
four-month high, underpinned by speculation that China will
unveil stimulus measures to re-energise its slowing economy. The
Aussie is used as a proxy for exposure to growth cycles in
China, Australia's key export market.
(Editing by Hugh Lawson and Pravin Char)