FOREX-Euro rides out inflation dip, hits 3-week high against yen

Reuters

* Bundesbank cools hopes of ECB easing, eyes on inflation

* Yen touches 6-year low vs New Zealand dollar

* Hopes of China stimulus keeping risk demand buoyant

* China PMI on Tuesday also in focus (Recasts, adds details, fresh quotes)

By Patrick Graham

LONDON, March 31 (Reuters) - The euro rose to a three-week high against the yen on Monday, recovering from a dip after lower than expected inflation numbers, though the European Central Bank is not expected to cut rates when it meets later this week.

Dealers said new bets for a weaker yen against the dollar and euro have been placed since players squared up for the end of the Japanese trading year on Thursday.

The prospect of more steps to ease monetary policy in Japan later this year at a time when U.S. officials are reining in their own money-printing argues for a stronger dollar. The greenback also rose against the yen, gaining 0.4 percent.

"I heard on Friday that there was a chunk of U.S. money going into structures on the topside (for the dollar) and the dollar has been grinding higher since then," said Graham Davidson, a spot dealer at NAB in London.

"That has been helped by U.S. yields going a bit higher and Bunds have done the same."

Structures in market jargon refers to options betting on a move one way or another in a currency. CFTC data on positioning showed speculative bets against the yen had fallen off ahead of the last trades in the financial year in Japan ending on Monday.

The market also on balance now looks doubtful about the prospect of any action by the European Central Bank to ease its own policy further this week.

Data on Monday showed inflation sank to just 0.5 percent in March but, as Bundesbank chief Jens Weidmann underlined on Saturday, much of the fall has been due to one-off drops in energy and food prices over which the ECB has little control.

The common currency continues to be supported by a return of cash to bond markets in the euro area's southern half as well as Germany's huge current account surplus, helping it to buck forecasts of a stronger dollar this year.

"The euro got trashed around the inflation numbers but then came roaring back," Davidson said.

"I think the market has probably priced in the story on the fall in inflation. The bottom line is that the economy is recovering and my hunch would be that the bank does nothing."

INTERVENTION

A press interview published with Weidmann last week had fueled talk that Germany's resistance to emergency steps to pump more money into the euro zone economy was softening, driving the euro to its lowest in a month against the dollar.

Most players now cast that as a reflection more of the concern that a euro closing in on $1.40 per dollar generates among ECB officials.

"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," said Peter Kinsella, a currency strategist with Commerzbank in London.

"Probably they are not ready to do so yet."

Overnight the yen touched a six-year low against the New Zealand dollar as demand for the safe-haven currency waned amid hopes of more stimulus from China.

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.

Investors will also be watching comments by U.S. Federal Reserve Chair Janet Yellen due later on Monday for any fresh hints on the U.S. 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.

(Additional reporting by Ian Chua and Masayuki Kitano; Editing by Gareth Jones)

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