* Trichet's comments soften concerns about Merkel's loss * Monetary policy seen as key driver for euro and dollar * Higher rates seen adding pressure to peripheral zone (Updates prices, adds quotes)
By Julie Haviv
NEW YORK, March 28 (Reuters) - The euro outperformed most major currencies on Monday, with more gains likely over the near term, given that investors believe that tighter monetary policy by the European Central Bank is around the corner.
ECB President Jean-Claude Trichet said on Monday inflation rates are durably above the central bank's price stability target.
The possibility of higher interest rates as early as next month softened concerns about Germany's ruling party losing a key state election.
The euro gained after Trichet's comments. It was up 0.1 percent for the day at $1.4096 after sliding as much as 0.3 percent on the back of concerns about Chancellor Angela Merkel's loss. The euro, nevertheless, is off a 4-1/2 month high of $1.4249 hit last week on EBS.
The euro also fared well against the yen, gaining 0.5 percent to 115.14.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York, said markets are highly anticipating that the ECB is going to raise rates.
"Although Trichet says the ECB does not pre-commit, the failure to raise rates at the April 7 meeting would likely be disruptive," he said.
The tightening of monetary policy and the strength of the euro, however, will likely exacerbate the pressure in the debt-strapped countries in the periphery, he said.
"Although the periphery is a relatively small part of the euro-zone GDP, the potential contagion and political fallout still needs to be reckoned with," he said.
Merkel's conservatives' loss on Sunday after the vote in Germany's region of Baden-Wuertemberg, which they had held for nearly six decades, led markets to bet that she will have less leeway to shore up financially stricken members of the single currency bloc.
But expectations of an interest-rate increase in the euro zone continue to offset worries about heavily indebted Portugal and Spain.
Near-term euro support lies at the 20-day moving average near $1.40, and trendline support around $1.3975, which is drawn through the euro's Jan. 10 low of $1.2860 and its March 11 low of $1.3752.
The U.S. dollar index was down 0.1 percent at 76.118 and has been bouncing around a 15-month low. Monetary policy should remain a key driver for the dollar and recent hawkish comments from Federal Reserve officials have highlighted how sensitive the greenback has become to any potential shift in the stance at the central bank.
"A shift to a more hawkish stance at the Fed, is an important risk to our USD bear view," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. "However, we continue to believe that the Fed will remain on hold for many quarters to come, and prove one of the last central banks to finally tighten policy."
This, in the medium term, should prove a weight against the dollar, she said.
U.S. consumer spending rose slightly more than expected in February for the eighth straight month of gains as households tapped their savings, U.S. Commerce Department data showed on Monday, while inflation accelerated at its fastest pace since June 2009.
Data on the U.S. housing market, meanwhile, showed strength.
The dollar was up 0.4 percent at 81.64 yen with implied volatilities staying low, which traders said was ruling out the need for any further official yen selling intervention in the near-term.
One-month dollar/yen volatility traded around 10 percent, compared with around 20 percent when the yen rose to a record high of 76.25 earlier this month. (Reporting by Julie Haviv; Additional Reporting by Anirban Nag and Neal Armstrong in London; Editing by Jan Paschal)