August 28, 2014 / 11:37 AM / 3 years ago

FOREX-Safe-haven yen and Swiss franc gain on Ukraine worries

* Escalation of Ukraine tensions pushes up yen, Swiss franc

* Euro hits 21-month low against Swiss franc

* German inflation eyed

By Jemima Kelly

LONDON, Aug 28 (Reuters) - The yen and Swiss franc gained on Thursday, while the euro fell, as concerns about a serious escalation in tensions between Ukraine and Russia rattled investors and drove them to seek safe-haven currencies.

The euro hit a 21-month low against the Swiss franc of 1.2052 francs per euro on trading platform EBS after the news. Against the yen, the single currency fell to a two-week low of 136.41 yen per euro.

"If the situation deteriorates  the obvious loser is the euro," said Adam Cole, global head of currency strategy at RBC Capital Markets. Germany, the euro zone's largest economy, is one of Russia's biggest trading partners.

"The yen is the most secure safe-haven within G10 - it's really the only currency which is trading solidly as a safe-haven at the moment. So euro/yen lower would be the clearest move that you'd see on the back of that."

The move lower for the euro against the Swiss franc triggered speculation that the Swiss National Bank may intervene to honour its 3-year pledge to keep the euro above 1.20 francs in order to ward off the threat of deflation.

The euro had earlier been trading at its highest this week after feverish speculation of an imminent round of quantitative easing by the European Central Bank cooled a little.

Sources told Reuters on Wednesday that the ECB was unlikely to take new policy action at its meeting next week unless inflation figures on Friday show the euro zone sinking significantly towards deflation.

But the euro fell against the dollar to as low as $1.3171 on EBS after Ukraine accused Russia of bring troops into the country. It fell not far from a near one-year low of $1.3151 hit earlier in the week.

DEFLATIONARY RISK

The euro has been struggling since the weekend after dovish comments from ECB President Mario Draghi, who said the central bank would use "all the available instruments" to ward off the threat of deflation.

Traders will be closely watching preliminary German inflation data due later on Thursday to gauge how soft the overall euro zone number might be on Friday. Bloc-wide inflation is expected to have fallen to 0.3 percent from 0.4 percent - well into the ECB's "danger zone" of below 1 percent.

But if Friday's numbers do show the euro zone getting even closer to deflationary territory, that would not necessarily drive the ECB to act, despite Draghi's comments, some said.

"You could have argued that QE (quantitative easing) should have come along when inflation was at 0.8 or 0.9 percent, so we can't suddenly expect action just because inflation drops from 0.4 to 0.3, or even if it were to drop unexpectedly to 0.2," said Neil Mellor, strategist at Bank of New York Mellon. "There aren't any clear parameters the ECB is abiding by."

Meanwhile, the Australian dollar fared well, touching a three-week high of $0.9373 after data showed a better-than-expected outlook for Australian business investment.

Later on Thursday, an update to second quarter U.S. growth data should also garner some attention, although the report is likely to confirm that the economy rebounded sharply from the first quarter. (Editing by Jeremy Gaunt)

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