FOREX-Dollar falls broadly as Iran warship worries weigh

* Swiss franc, euro gain on Iran warship concerns

* Dollar rally vs yen loses steam despite economic data

* Sterling slides on BOE inflation report

(Recasts, updates prices, adds quote, story link)

By Julie Haviv

NEW YORK, Feb 16 (Reuters) - The dollar slumped broadly on
Wednesday after Israel said Iranian warships were en route to
Syria and demand for non-U.S. safe-haven currencies was seen
thriving should the situation worsen.

Israel's foreign minister said moves by two Iranian war
ships to sail through the Suez canal to Syria were a
"provocation" by Tehran. [nLDE71F2BQ]

"The dollar is being sold off against the Swiss franc and
the euro because should there be a conflict with Israel, this
would be bad for the U.S. as well, " said Brian Dolan, chief
currency strategist at Forex.com in Bedminster, New Jersey.

The Swiss franc, a traditional safe-haven especially during
times of geopolitical turmoil, was last at 0.9619, up 0.5
percent against the dollar CHF=. It soared nearly 1 percent
after the news broke.

The franc initially gained 0.2 percent against the euro
EURCHF= and was last up 0.1 percent at 1.3032.

"The market has been really volatile over the past few days
and the latest events have certainly added to that," said
Charles St-Arnaud, foreign exchange strategist at Nomura
Securities in New York.

Firmer overseas equities market and a well-received debt
auction out of Spain, buoyed demand for the euro as well, he
said.

"Confidence in sovereign debt has improved and the
situation in Europe may be stabilizing," he said. "Spain is the
main player right now, so a solid auction bodes well for the
euro."

The euro rose 0.4 percent against the dollar to $1.3547
EUR=, its second consecutive daily gain.

Meanwhile, the dollar's nearly two-week rally against the
yen came to a halt, with earlier gains erased as U.S. Treasury
yields fell on the Mideast news. U.S. inflation and housing
data sent Treasury yields higher earlier in the session. For
more, see [ID:nLLAGDE7BN] and [ID:nCAT005381

The dollar has outperformed the yen in 9 of the past 11
sessions as U.S. Treasury yields factored in inflation. In
early afternoon New York trading the dollar was down 0.1
percent at 83.64 JPY=, after rising 0.2 percent earlier in
the session.

"The Federal Reserve's contention has been that although
inflation has been seen overseas, it's not yet impacted the
United States. More to the point, the Fed is not going to be
concerned until it spills over into the core (inflation)
reading," said Michael Woolfolk, senior currency strategist at
BNY Mellon in New York.

"What we see from this is that it has indeed spilled into
the core and could force the Fed to rethink its outlook for the
remainder of the year," he said. "That said, one report does
not a trend make. But it has certainly put inflation data on
the radar for the market."

The dollar/yen is the currency pair most sensitive to
movements in bond yields because both units are competing as
the markets' favored funding currency. Any shift in the yield
curve or rate expectations typically affects both currencies.

To see an analysis on market inflation expectations
double-click on, [ID:nN15149987].

Sterling fell sharply as investors revised expectations for
a rate rise after the Bank of England downgraded its economic
growth forecast in its quarterly inflation report, even as
consumer prices spiked higher.

The central bank predicted a bumpy ride for the economy
this year, with its 2011 forecasts for growth lower than in
predictions made in November. [ID:nBELGDE74P]
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Sterling GBP=D4 fell to the day's low of $1.5988,
according to Reuters data, compared with around $1.6140 before
the Bank of England's quarterly report on inflation was
released. It also lost ground against the euro, with the common
currency rising to a session high of 84.34 pence EURGBP=D4
from 83.85 pence.

"One suspects that some large speculative players are
positioned with double no-touch options, collecting a pay-out
should the euro never hit $1.33-$1.38 over the next month,"
said Chris Turner, head of FX strategy at ING.

(Additional reporting by Gertrude Chavez-Dreyfuss and
Steven C. Johnson in New York and Neal Armstrong in London;
Editing by Andrew Hay)