LONDON: The euro held firm on Monday ahead of inflation data that will set the tone for this week's meeting of the European Central Bank, which again faces the dilemma of whether to take more action to spur growth and weaken the currency.
Comments from Bundesbank chief Jens Weidmann on Saturday cooled hopes, based on a press interview last week, that Germany's resistance to emergency steps to pump more money into the euro zone economy was softening.
The interview last Tuesday pushed the euro to its lowest in a month against the dollar but it has since recovered solidly. Early on in Europe it was unchanged from levels around $1.3750 seen late in the US day on Friday.
"I think it is pretty clear now that Weidmann's comments last week were misinterpreted," said Peter Kinsella, a currency strategist with Commerzbank in London.
"They have been verbally intervening to talk the euro down from the highs near $1.40, and the question is whether they are ready to back that up with concrete action. Probably they are not ready to do so yet."
After lower German inflation numbers on Friday, corresponding data for the euro zone due at 0900 GMT is expected to show an inflation rate of just 0.6 percent in March.
Weidmann said about two-thirds of the fall so far in inflation was due to drops in energy and food prices which would prove temporary and should not provoke the ECB into action. But some economists said a below-forecast number on Monday could leave the bank's 24-strong governing council with no choice but to act.
"An undershoot would significantly increase the risk that the ECB lowers the deposit rate on Thursday," said Paul Robson, a strategist with RBS in London. "We would look to sell the euro if CPI prints 0.5 percent."
KIWI IMPROVES
The yen struggled to gain traction versus the dollar and touched a fresh six-year low against the New Zealand dollar as demand for the safe-haven currency waned amid hopes of more stimulus from China.
The dollar inched up 0.1 percent to 102.94 yen, well above Friday's session low near 102.03 yen.
The kiwi, supported for months by expectations of a cycle of interest rate rises begun by the central bank at its last meeting, rose as far as 89.26 yen, a level not seen since November 2007.
Traders said China's official manufacturing PMI survey due on Tuesday will be closely watched after a recent string of disappointing data pointed to a slowdown in the world's second biggest economy.
"We expect a decline to 49.8 in March from 50.2 in February, falling below 50 for the first time in 17 months, as growth momentum continues to fade. This should further heighten the urgency to ease policy," analysts at Nomura wrote in a note to clients.
Investors will also be watching comments by US Federal Reserve Chair Janet Yellen due later on Monday for any fresh hints on the US monetary policy outlook.
The dollar got a boost earlier this month after Yellen said the Fed could raise rates six months after its bond-buying stimulus ends, remarks that were seen as suggesting a rate hike could come as early as spring 2015.
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