FOREX-Euro struggles after data disappoints, yen holds firm
* German Ifo falls short of forecast
* Comments from ECB's Draghi, Nowotny weigh on euro
* Concerns over US govt shutdown could come under spotlight
* Kiwi falls after jump in trade deficit
TOKYO/SINGAPORE, Sept 25 (Reuters) - The euro was on the defensive on Wednesday following weaker-than-expected German sentiment data, while worries over a possible U.S. government shutdown underpinned the yen against the dollar.
Traders, wrong-footed by last week's shock decision by the U.S. Federal Reserve to keep its bond-buying stimulus intact, also remained cautious and on data-watch mode as they considered for how long the U.S. central bank could hold off from tapering.
That uncertainty over the Fed's outlook and comments on Monday from European Central Bank President Mario Draghi that the bank was ready to provide more long-term loans to keep money market rates from rising have kept the dollar and euro pinned down.
Draghi's message was reinforced on Tuesday by Ewald Nowotny, a member of the ECB Governing Council, who said that it was too soon for the bank to go into exit mode from its crisis measures.
The single currency faced more selling pressure overnight after data from the Ifo think tank on Tuesday showed that German business morale improved slightly in September to touch a 17-month high, but the index fell short of the consensus forecast.
"It seems like an improvement in the euro zone economic data has stalled. In addition, now that Germany's election is over, the market could dust off the issues that had fallen out of focus, such as further aid to Greece," said Masafumi Yamamoto, forex strategist at Praevidentia Strategy.
The euro traded at $1.3474, little changed from late U.S. trade on Tuesday and down 0.4 percent so far this week.
The dollar eased 0.1 percent to 98.63 yen and was down about 0.7 percent so far this week. Initial support is seen around 98.30 yen.
The yen held firm against the dollar, as U.S. bond yields fell on softer-than-expected U.S. data and as concerns over a U.S. government shutdown weighed on risk sentiment.
"It does look a bit like a cliffhanger," said Bart Wakabayashi, head of forex at State Street, but added that many market players still expect a last-minute political compromise.
For now, the political wrangling in Washington may overshadow the underlying concerns over the Fed's policy outlook, market players said.
"It's not clear whether the Fed will taper its stimulus in October or December. And even if it's October, the Fed's policy meeting will be in late October, which is some time ahead. So the market may become less sensitive to Fed comments," said Praevidentia's Yamamoto.
Against the yen, the dollar seemed to be forming a triangle pattern on technical charts, suggesting that the market may be accumulating energy ahead of a possible breakout, said a trader for a Japanese bank in Singapore.
"In the end, I think the dollar will break higher, but U.S. bond yields will have to rise for that to happen," he said, adding that such moves were unlikely to occur immediately.
"For now, everybody is cautious on the (U.S.) economy, in the wake of the FOMC," he said, referring to last week's Fed policy meeting.
A big mover was the New Zealand dollar, which fell 0.4 percent to $0.8242 following government data showing the country's trade deficit soared to its highest level in five years.
The currency has lost 2.4 percent after hitting a 4-1/2-month high of $0.8445 at the start of this week.