FOREX-Euro firm on expectations of inflation uptick, dwindling cash

Mon Apr 28, 2014 6:31am EDT

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(Adds details about euro zone money markets)

* 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 Anirban Nag

LONDON, April 28 (Reuters) - The euro rose to a two-week high against the dollar on Monday, aided by higher money market rates and expectations inflation in the euro zone will tick up and ease pressure on the European Central Bank to loosen monetary policy.

Sterling soared to a 4-1/2-year high against the dollar , boosted by robust data and expectations of merger and acquisition inflows, after Pfizer confirmed it had made a bid approach to Britain's No. 2 drugmaker, AstraZeneca.

But most are unlikely to take aggressive positions before major events in the United States and the euro zone. Policy reviews by the U.S. Federal Reserve and Bank of Japan (BoJ) will also keep the market cautious in a holiday-shortened week. Many centres in Europe and Asia will be shut on Thursday for Labour Day. Japanese markets will be closed on Tuesday.

The euro rose 0.3 percent to $1.3880 and gained 0.4 percent to 141.95 yen. The euro was supported by 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 ECB's balance sheet at a time when both the Fed and the BOJ were expanding theirs through asset purchases. Firm money market rates burnish the euro's appeal to yield-hungry investors.

Traders said expectations that euro zone consumer price inflation could rise when data is released later this week were also supporting the single currency. Euro zone inflation for April, due on Wednesday, is forecast to rise to 0.8 percent year-on-year from 0.5 percent previously.

"We are seeing some inflows into the euro," Altana Hard Currency Fund portfolio manager Ian Gunner said. "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."

ECB policymaker Christian Noyer said on Monday that the euro's strength was a powerful deflationary factor and low inflation is likely to persist.

DOLLAR FOCUS

The dollar rose against the yen to 102.35, but held well within its range over the past two weeks. U.S. yields, which have a good correlation to the pair, nudged higher in anticipation of encouraging economic data out of the United States, including jobs numbers at the end of the week.

"There are three clear U.S. highlights: first-quarter GDP and the Federal Reserve decision on Wednesday and April's labour report on Friday," ING currency strategist Tom Levinson said.

"GDP may well be soft, but we take comfort from far better prospects for second quarter. The report should, though, be offset by a firm ISM survey and 200,000 plus nonfarm payroll report," he said.

All this would see the Fed trim its asset purchases by another $10 billion to $45 billion, Levinson said.

The Fed is expected to cut back further on its bond-buying stimulus, but the BoJ is expected to maintain its stimulus programme at its April 30 meeting, all of which should see the dollar supported at lower levels against the yen. (Editing by Louise Ireland)

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