May 9, 2014 / 12:30 AM / 4 years ago

FOREX-Battered euro nervous after slumping on dovish Draghi comments

* Yen stays firm, Ukraine separatist referendum on Sunday eyed

* Australian dollar hovers below 3-week peak

By Shinichi Saoshiro

TOKYO, May 9 (Reuters) - The euro was binding its wounds in early trade on Friday after dovish comments from European Central Bank President Mario Draghi sent the currency tumbling from a 2-1/2 year high on Thursday.

The euro traded little changed at $1.3843 on Friday morning, having pulled back from $1.3992 hit on Thursday, the highest since November 2011.

Draghi said the euro’s strength was “a serious concern” and that the ECB bank might act to stem falling inflation at its June meeting, signalling possible easing.

Before being beaten down by Draghi’s comments, the single currency surged to the 2-1/2 year peak after the ECB on Thursday kept monetary policy unchanged as expected.

While it has not drawn a line in the sand, traders say the ECB, which has focused on the euro’s strength in the past few weeks, gets uneasy when the euro rises towards $1.40. A Reuters poll on Wednesday showed most economists expect ECB action if the euro hits $1.42.

“Focus going forward is what the ECB actually does in June, with a rate cut and a negative deposit rate being the expected course of action,” said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.

“But rates are already low at 0.25 percent that even if the ECB does lower it the impact will be limited, and this will not be effective in curbing euro strength,” Kadota said, adding that expectations will quickly build towards next possible steps like provision of liquidity and ultimately quantitative easing.

The dollar remained on the defensive against the yen, weighed by persistently dovish comments from the Federal Reserve and low U.S. Treasury yields.

Simmering tensions in the Ukraine have also supported the safe-haven yen currency and the market kept an eye on a May 11 separatist referendum.

Pro-Russian separatists voted unanimously on Thursday in favour of holding a referendum on independence, defying calls by Russian President Vladimir Putin to postpone the vote to open the way for talks with the Kiev authorities.

The dollar traded little changed at 101.615 yen, having lost about 0.55 percent on the week against the Japanese currency.

The Australian dollar stood at $0.9369, hovering near a three-week high of $0.9395 hit on Thursday on upbeat Australian and Chinese economic data. (Editing by Eric Meijer)

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