FOREX-Euro hovers near 3-week low, inflation key before ECB meets

* Euro pressured by ECB easing speculation

* Kiwi among the best performers, hits 2-1/2 year highs vs USD

* German, euro zone inflation data next in focus

(updates prices, details about options)

LONDON, March 28 (Reuters) - The euro fell to a three-week low against the dollar on Friday, with investors mindful of strong rhetoric from European Central Bank officials about its recent strength and awaiting German inflation data that could undermine it further.

Slightly soft Spanish inflation numbers put pressure on the euro, with more sellers likely to line up if the German data, due at 1300 GMT, underlines concerns about below-par inflation across Europe's largest economy, traders said.

That will keep alive the risk of a lower overall euro zone inflation reading for March on Monday, and bolster the chances that the ECB will act to ward off disinflation in the bloc. The ECB meets next Thursday and if it refrains from easing, as io previous months, that could give the euro a boost.

"The March consumer inflation numbers for the euro zone are important and we expect a soft reading, which will lead to expectations of a dovish ECB," said Yujiro Gato, currency analyst at Nomura.

"So there are downside risks to the euro going into next week although, having said that, there is always a chance that the ECB may disappoint and take no action. In that case, the euro is bound to react strongly."

The euro was slightly lower on the day at $1.3730, having dipped to $1.37045 earlier, and was on track to end lower for a second straight week. Against the yen, it recovered to 140.55 yen, having dropped to 139.96 yen, its lowest level since early March.

Uncertainty whether the ECB will take action has injected volatility. The one-week implied volatility in the euro/dollar pair, a gauge of how sharp currency swings will be, climbed to 8.95 percent from 4.9 percent earlier this week.

The euro has sagged since suggestions of more ECB action this week from Germany - whose policymakers have in the past repeatedly voiced concerns about unorthodox monetary easing.

ECB Governing Council member and Bundesbank chief Jens Weidmann said negative interest rates were an option to temper euro strength, and that buying loans and other assets from banks was not out of the question.

Peripheral European government bond yields hit a multi-year trough on Friday while the gap between U.S. two-year bond yields and their German counterparts has widened.

An overwhelming majority of economists polled by Reuters expect no imminent rate move at the April 3 meeting. Only two of 72 economists predicted a rate cut, compared to 26 of 78 who did so before last month's meeting.


In contrast to the ECB, the central bank in New Zealand was on course to normalise policy, having raised interest rates this month from a record low and flagged more tightening.

Unsurprisingly, the New Zealand dollar has been among the strongest performers in recent months. It rose as far as $0.8698 , a high not seen since August 2011. Against the yen, the kiwi hit a six-year high of 88.94.

The U.S. dollar inched up to 102.35 yen, buoyed in part by expectations that the Federal Reserve may start to tighten policy in the early part of next year.

The yen showed limited reaction to data that showed Japan's core consumer prices rising 1.3 percent in February from a year earlier, posting a ninth straight month of gains and hinting that the economy is making some progress towards overcoming 15 years of deflation.

Japan's CPI is expected to gather more attention after the country raises its consumption tax in April, which may cool consumer spending and raise speculation of further monetary easing by the Bank of Japan.

"Into the March 31 year-end, dollar/yen may be pressured below 102, but thereafter concerns about the negative impact from April's sales tax hike might weigh on the yen," said Tom Levinson, currency strategist at ING.

(Editing by Kevin Liffey)