FOREX-Euro firm on safe-haven flow, expectation for inflation uptick

Mon Apr 28, 2014 11:23am EDT

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(Updates with New York open, U.S. data; changes dateline and byline)

* Sterling at 4-1/2-year high vs dollar

* Major event risks: U.S. jobs, euro zone inflation

* Fed and BoJ policy meetings also in focus

By Daniel Bases

NEW YORK, April 28 (Reuters) - The euro hit a two-week high against the U.S. dollar on Monday, helped by both safe-haven flows due to the Ukraine crisis and expectations euro zone inflation will show an increase this week, lessening the need for looser monetary policy.

Sterling edged to a 4-1/2 year high against the greenback after flirting with the level for the past month. Improving economic activity and the potential buyout of British drugmaker AstraZeneca by U.S. drugmaker Pfizer helped the pound.

On Monday, the United States imposed sanctions on seven Russian government officials and 17 companies linked to Russian President Vladimir Putin in a fresh attempt to force Moscow to back down from its intervention in Ukraine.

"Since the onset of the Ukraine crisis the euro has benefited. We expect that pattern to continue," said Michael Woolfolk, global markets strategist at BNY Mellon in New York.

Woolfolk said even if sanctions impact Russia's main trading partners, the euro will still find demand.

"The attraction of the euro is not because of growth differentials but rather due to safe-haven capital flight. Euros are more easily attained than dollars and there is a concern that dollar-denominated assets could be more easily subjected to sanctions," he said.

The euro reached a session high $1.3905 before slipping to $1.3852, up 0.15 percent. Euro support also came from a spike in overnight euro zone rates as surplus cash in the banking system decreased, with banks repaying cheaper loans taken earlier from the central bank.

That repayment shrank the European Central Bank's balance sheet at a time when both the U.S. Federal Reserve and the BOJ were expanding theirs through asset purchases. Firm money market rates burnish the euro's appeal to yield-hungry investors.

Currency markets were little changed by the first increase in nine months for U.S. pending home sales.

April Euro zone inflation data is expected to rise 0.8 percent year-on-year from 0.5 percent previously. The data are due Wednesday.

The dollar rose 0.38 percent to 102.54 yen.

Monetary policy reviews by the Fed and the Bank of Japan (BoJ) this week will likely limit aggressive positioning. Many centers in Europe and Asia will be shut on Thursday for Labour Day. Japanese markets will be closed on Tuesday.

The euro gained 0.52 percent to 142.04 yen.

"Euro zone inflation should confirm that we have seen the lows. If inflation comes in line with expectations, we could see euro trading at $1.39 when the ECB meets next week," said Altana Hard Currency Fund portfolio manager Ian Gunner.

ECB policymaker Christian Noyer said on Monday the euro's strength was a powerful deflationary factor and low inflation is likely to persist. (Editing by Louise Ireland and Meredith Mazzilli)

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