NEW YORK (Reuters) - The euro fell against the dollar and yen on Wednesday, with traders increasingly cautious ahead of a European Central Bank meeting on Thursday in the event that ECB President Mario Draghi raises concerns about the high level of the euro.
Most analysts believe Draghi will avoid commenting on the currency but rather recognize the improvement in the euro zone outlook and in market sentiment while acknowledging the region still faces many hurdles.
The extent of nervousness was shown when the euro pared losses on Wednesday on comments by German government spokesman Steffen Seibert, who said the euro was not over-valued and that long-term competitiveness could not be achieved via exchange rates.
Traders said the euro was likely to be sold on any rallies ahead of Thursday's ECB meeting, but it could resume its recent rise afterward.
"The focus is speculation over tomorrow's ECB statement and President Draghi's press conference," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. "We expect President Draghi to sound notably cautious and EUR to weaken on the back of it."
The euro fell 0.4 percent to $1.3535, edging down from last week's peak of $1.3711, its highest since November 2011, with political uncertainty in Spain and Italy also weighing. Some US$3.75 billion in euros changed hands on Wednesday using Reuters Dealing.
Against the yen the euro was down 0.5 percent at 126.63 yen, off a 34-month peak of 127.69 touched in Asian trade, with the yen remaining under selling pressure on expectations of aggressive monetary easing in Japan.
French President Francois Hollande called on Tuesday for a target exchange rate to protect the currency from "irrational movements", although the idea ran into immediate opposition from Germany.
The ECB is expected to leave interest rates on hold on Thursday and the focus will be on Draghi's subsequent news conference.
"The market is a bit nervous ahead of the ECB meeting ... people would like to know what the ECB's position is as regards Hollande's comments," said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.
She said she expected Draghi to be cautious and avoid commenting directly on the currency, although he was likely to face questions about it. If Draghi did comment on the potentially harmful impact of a stronger euro, however, it could be seen by the market as a kind of verbal intervention.
Analysts at Deutsche Bank said they were "turning more neutral" on euro/dollar, though they still expect a $1.35-$1.40 range for the rest of the first quarter.
The euro is up 2.6 percent for the year to date against the dollar.
Banks have been repaying the ECB's ultra-cheap three-year loans. This has acted as an effective tightening of euro zone monetary policy at a time when the U.S. Federal Reserve and the Bank of Japan are expanding their balance sheets.
The dollar was last down 0.1 percent against the yen at 93.52 yen after reaching a peak of 94.06 in Asian trade, its highest since May, 2010. Traders reported hedging-related demand and buying by longer-term investors, with supporting bids at 93.50 yen.
Some US$2.76 billion in yen changed hands on Wednesday, using Reuters Dealing.
News on Tuesday that current Bank of Japan Governor Masaaki Shirakawa will step down three weeks earlier than planned spurred the latest bout of yen selling.
Japanese Prime Minister Shinzo Abe, who has put the BOJ under pressure to do more to spur the economy, has made it clear he wants a governor who will be bold in easing monetary policy.
"As far as Japan is concerned they are exceeding market expectations with the pace of policy implementation and that's going to keep the yen under pressure," said Ian Stannard, European head of FX strategy at Morgan Stanley in London.
He said Morgan Stanley's first-quarter forecast of 95 yen was likely to be exceeded, and a test of 98 to 100 yen was within reach.
Reporting by Nick Olivari; Editing by Dan Grebler