* 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 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] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ To visit Reuters Insider's "United States of Distress" microsit e, please double-click: link.reuters.com/jyg97r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
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)