(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 (Reuters) - 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 bond buying.
“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)