* Euro pressured by Sarkozy comments on exchange rate
* Market bracing for Spanish bond auction on Thursday
* Yen falters as Japan trade deficit, easing in focus
By Nia Williams
LONDON, April 18 (Reuters) - The euro fell against the dollar on Wednesday after French President Nicolas Sarkozy said a strong euro hurt exporters, and it looked set to stay pressured with investors still wary of Spain's fiscal problems and wider euro zone debt contagion.
Traders cited selling by Swiss investors after Sarkozy said the euro's exchange rate should be up for discussion with the European Central Bank.
The euro edged lower throughout the European session to hit a session low of $1.3076. The move erased modest gains made the previous day on upbeat earnings from U.S. companies, decent demand at a Spanish bill auction and a better-than-expected German ZEW sentiment survey.
Market players said the euro could post further losses ahead of a Spanish bond auction on Thursday, and poor demand and high yields at the auction would aggravate concerns about Spain's fragile fiscal position.
"The euro is in a very narrow trading range as we wait for tomorrow. There is a lot of uncertainty in the market and people will speculate on a bad outcome, which should be a burden for risky assets," said Lutz Karpowitz, currency strategist at Commerzbank.
Comments from ECB policymaker Jens Weidmann that Spain should not expect the central bank to tackle rising debt yields by buying Spanish bonds also weighed on the common currency, although strategists said the impact was limited as Weidmann's opposition to the policy was well-known.
There was little reaction in currency markets to Germany selling two-year bonds at a record low yield.
The euro has traded roughly between $1.30 and $1.35 since January, and has struggled to rise above $1.32 since early April. CitiFX Wire said in a note that its traders were looking to buy the range-bound currency on dips.
"It's a sideways movement because we do not know exactly what happens with QE3 in the U.S. and on the other hand we have the European debt crisis which is not solved. It's very difficult for investors to take a stance," said Karpowitz.
Investors are still looking for clues as to whether the U.S. Federal Reserve will opt for another round of asset purchasing this year, known as QE3. More loose monetary policy aimed at stimulating growth would be expected to weigh on the dollar.
In recent weeks there has been a growing perception in the market that the Fed may not hint at further easing at its April 24-25 meeting, in contrast to expectations the Bank of Japan will take fresh easing steps on April 27.
Bank of Japan deputy governor Kiyohiko Nishimura said on Wednesday that the central bank was ready to ease policy further if necessary to help Japan's economy recover.
Those expectations weighed on the yen, which also came under pressure ahead of Japanese trade data on Thursday that is forecast to show Tokyo's trade balance swung to deficit in March after a small surplus in February.
The dollar rose 0.7 percent against the yen to 81.43 yen. The euro traded up 0.5 percent on the day at 106.61 yen, rising clear of Monday's low of 104.62 yen.
Some analysts said the market was pricing in further easing too aggressively, opening the door to a rebound in the yen.
"Even if they get 5 trillion yen extra in asset purchases it probably won't be enough because the market is expecting so much. We recommend holding dollar/yen shorts going into the meeting," said Geoff Kendrick, currency strategist at Nomura.
Sterling rallied against the euro and dollar after minutes showed the Bank of England was concerned about high inflation persisting into the medium-term and one policymaker dropped his long-standing call for more stimulus.
The euro fell 0.7 percent against the pound to 81.87 pence, its lowest level in 19 months and below reported options barriers at 82 pence.
Meanwhile, Swedish crown rose to a two-week high against the euro of 8.8350 crowns after the Riksbank left rates on hold and said it expected to keep them there for at least a year.
Trending On Reuters
The death toll from Nepal's earthquake could reach 10,000, the prime minister Sushil Koirala said, as residents frustrated by the government's slow response used their bare hands to dig for signs of their loved ones. Full Article | Pictures