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Bankers, traders wary of strengthening euro going to $1.40

NEW YORK, March 28 (Reuters) - The euro in recent days has come tantalizingly close to hitting $1.40, an attention-getting level that may push Europe's central bankers to loosen monetary policy, according to foreign exchange strategists and traders.

Just this month, before a rally in the dollar, the currency shared by 18 countries touched a high of $1.3967 on March 13. Some profit taking and improved U.S. economic figures stemmed the rally in the single currency, but strategists believe it's only a matter of time before the euro breaches $1.40, a level it hasn't seen since 2011.

"At $1.40, we might see some talk from European central banks about the euro getting ahead of itself. You might see a pullback," said David Bradley, director of foreign exchange trading at Scotia Capital in Toronto.

A $1.40 euro would hurt the region's businesses and employers by making imports cheaper and exports pricier. The higher euro would undercut efforts policymakers have made to lower rates as a way to boost tepid economic growth and deflect possible deflation.

In February, euro zone annual inflation dropped to a level that last November had triggered a surprise cut in interest rates. February's year-on-year inflation rate was 0.7 percent against 0.8 percent in January and matched the lowest posted in four years.

Europe's central bankers have said they stand ready to make monetary policy shifts if the euro zone's inflation rate should fall short of 1 percent this year, 1.3 percent in 2015 and 1.5 percent in 2016.

Central bankers already increasingly talk about sluggish lending and other burdens aggravated by a strengthening euro, which rose 4.5 percent against the dollar during 2013, according to Nick Bennenbroek, head of currency strategy at Wells Fargo Securities in New York.

"The strength of the euro has become increasingly relevant for ECB policymakers," said Bennenbroek. "If we see a return to $1.40 or beyond, it may possibly elicit some sort of policy response."

European central bankers are already cautioning against a strong euro, with European Central Bank President Mario Draghi on Tuesday saying the ECB was tracking currency markets.

"Draghi has shown the ECB is tired of euro appreciation. But after the jawboning, the market wants to see something concrete," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

Possible ECB steps include interest rate cuts or curtailing the bank's weekly "sterilization" process worth about $175 billion. By downshifting or suspending the four-year-old sterilization program, put in place to neutralize the effects of buying bonds issued by Greece and other struggling economies, the ECB would encourage business by enlarging the region's money supply and lowering short-term interest rates.

Currency traders, too, see $1.40 as a possible trigger, with selling of the euro almost sure to accelerate as the euro nears that level, according to Bradley. Some traders see resistance at the $1.3967 peak last touched on March 13.

"A lot of people have been targeting that level," Bradley said. "As you approach a key level, a lot of players sell short of that. It generally doesn't break the first time."

(Reporting by Michael Connor; Editing by Chizu Nomiyama)