(Corrects quote in paragraph 10 to refer to external not
temporary factors acting on inflation and reflect bank's view
that ECB will need to ease policy further)
* German data bolsters dollar demand
* Sterling softens after slight disappointment on GDP
By Michael Connor
NEW YORK, April 29 The dollar rose against the
euro on Tuesday as weaker-than-expected German inflation data
drove speculation in currency markets that the European Central
Bank may loosen monetary policy.
The dollar was also up 0.2 percent against the Japanese yen
at 102.64 yen, while the U.S. dollar index was
ahead 0.13 percent as U.S. central bankers began a two-day
meeting expected to bring another reduction in Federal Reserve
"If inflation comes in too low, that raises expectations the
ECB will lower rates or take other steps that will hurt the
currency," said Eric Viloria, currency strategist at Wells Fargo
Securities in New York. "Germany is Europe's biggest economy,
and we will be watching what happens."
Preliminary data from Berlin showed that German annual
inflation accelerated in April but at a slower than anticipated
1.1 percent. That possibly pushed up the euro zone rate but not
as much as ECB policymakers might hope.
Euro zone inflation is running at 0.5 percent and concerns
about deflation are rife. Data due out on Wednesday are expected
to show inflation in the single currency bloc picking up to 0.8
percent in April but that would still be well below the ECB's
medium-term target of just below 2 percent.
The euro was off 0.02 percent against the dollar in
late-morning New York trade at $1.3821 after touching a session
low of $1.3812.
The euro has struggled to push past a series of technical
barriers since a first approach last month to the big
psychological figure of $1.40 prompted warnings from the ECB
about the currency's strength.
But short-term euro zone interest rates continue to
push higher, boosting returns on the currency, and a source on
Monday said ECB President Mario Draghi had told German lawmakers
outright money-printing by the bank was still a long way off.
"Draghi's comments are one of the reasons the euro is
holding strong this morning," said Stephen Gallo, a strategist
with Canadian bank BMO in London.
"I think the market is coming to the realization that they
are quite relaxed about the threat of disinflation. There are a
lot of external factors behind the fall in inflation."
Like many analysts and investors, however, he believes the
ECB will have to do more at some stage to spur growth.
Britain's sterling pulled back from a 4-1/2-year high
against the dollar after the first estimate of gross domestic
product showed growth improving slightly but less than most
economists had expected.
The data showed Britain's economy, one of the brightest in
the developed world, improved further in the first quarter, but
there was widespread disappointment in a market that had been
counting on a stronger figure.
"The GDP figures have taken the wind out of sterling. It was
less so against the euro but there were quite a few people
hoping for another spurt higher against the dollar," said
another London-based dealer.
Sterling last stood at $1.6828 in New York trading
after touching a session low of $1.6794.
(Editing by Gareth Jones and Tom Brown)