April 14, 2014 / 7:50 AM / 3 years ago

CORRECTED-FOREX-ECB comments knock euro, but not much

(Removes wrong reference to trading above $1.39 in fifth paragraph)

* Euro dips after ECB flags option of easing

* Dollar pulls back from lows versus yen but still shaky

* Ukraine, stocks, Chinese data in focus this week

By Patrick Graham

LONDON, April 14 (Reuters) - The euro retreated modestly from levels close to this year's highs on Monday after the strongest signal yet from the European Central Bank that it will take action to head off further gains.

Six years of debt and banking crisis have laid bare how countries like Greece, Spain and Portugal suffer from a currency that will not easily fall thanks to the capital rolling into Germany, the Netherlands and other stronger economies.

Yet, aside from regular broadsides from France, ECB policymakers have tended not to focus too much attention on the currency. With prices falling in many of the bloc's southern states, that seems finally to be changing.

The ECB's Italian President, Mario Draghi, said in Washington on Saturday that "a further strengthening of the exchange rate would require further stimulus". Bank of France chief Christian Noyer hammered home the message on Monday saying: "The stronger the euro is, the more accommodative policy is needed."

The euro weakened about 0.3 percent against the dollar , yen and sterling. But, even with increased tensions in Ukraine fed into the mix, it held within a cent of 2014 highs above $1.39.

"What is telling is the extent to which the euro is strong even in the face of all of this," Simon Derrick, head of strategy with Bank of New York Mellon in London, said.

"I'd be daft to say the euro might not weaken a bit further in the next 24 hours or so, but after that I think we certainly will be having another look at $1.39 and $1.40."

The euro traded at $1.3848 in European trade, having risen about 1.5 percent last week, its largest weekly gain since September. It was at 140.70 yen near one-month lows against the Swiss franc at 1.2149 francs.

Ukraine, through which much of Europe's gas supplies flow from Russia, gave pro-Russian separatists a Monday morning deadline to disarm or face a "full-scale anti-terrorist operation" by its armed forces.

"Draghi and the situation in Ukraine are going to keep the euro heavy," Greg Gibbs, strategist at RBS in Singapore, said.

"But the reaction is pretty muted given the strength of Draghi's comments on the weekend."

Gibbs said while the market thinks further ECB stimulus is inevitable, other factors such as solid demand for peripheral euro zone debt were underpinning the euro for now.

BNY Mellon's Derrick pointed to signs of central banks shifting funds to euros from dollars. Traders have pointed to signs that some Asian central banks who intervened against their currencies in recent weeks may be exchanging some of the dollars gained.

BUOYANT YEN

Against the yen, the dollar was little changed at 101.620 yen above last week's trough of 101.30, but remained on the back foot after dropping 1.6 percent last week.

Market players said the dollar saw some reprieve from reports that Prime Minister Shinzo Abe would meet Bank of Japan Governor Haruhiko Kuroda during the month, which helped stoke expectations for further monetary easing by the central bank.

"The reports have helped the dollar but support is likely to melt away unless the meeting actually results in concrete steps," IG Securities market analyst Junichi Ishikawa said.

Escalating tensions in Ukraine and jitters surrounding the sell-off in technology stocks supported the yen as a traditional safe haven for investors' cash. On Friday, the Nasdaq closed below the 4,000 mark for the first time since February as investors turned sour on biotech and momentum stocks.

"Wall Street's performance will remain a key driver for the dollar and yen. Near-term focus is on 101.20 yen. It appears significant bids for the dollar are lined up there, and a break below that level is likely to trigger significant covering of yen shorts," Ishikawa at IG in Tokyo said. (Additional reporting by Ian Chua in Sydney and Shinichi Saoshiro in Tokyo; Editing by Louise Ireland)

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