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

Mon Apr 28, 2014 4:15pm EDT

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(Updates with late New York prices)

* Euro benefiting from Ukraine frictions

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

* 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 safe-haven flows due to the Ukraine crisis and expectations that 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 of $1.6856 after flirting with that milestone for the past month. It traded just a tad higher on the day at $1.6809. Improving economic activity and the potential buyout of British drugmaker AstraZeneca by U.S. drugmaker Pfizer helped the pound.

The United States imposed sanctions on seven Russian government officials and 17 companies linked to Russian President Vladimir Putin on Monday 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 $1.3879 before slipping to $1.3848, up 0.14 percent. Euro support also came from an overnight spike in 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 Bank of Japan were expanding their balance sheets 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 is due Wednesday.

Against the yen, the dollar rose 0.37 percent, to 102.53 yen .

Monetary policy reviews by the Fed and the Bank of Japan this week will likely limit aggressive positioning. Much of Europe and Asia will be shut on Thursday for Labor Day. Japanese markets are closed on Tuesday.

The euro gained 0.46 percent to 141.95 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 Ian Gunner portfolio manager with Altana Hard Currency Fund.

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, Meredith Mazzilli and Leslie Adler)

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