February 28, 2014 / 12:51 PM / 3 years ago

FOREX-Yen gains on emerging nerves, Swedish crown jumps after GDP

* Inflation surprise drives euro higher

* Yuan chalks up biggest weekly loss on record

* Focus also on tensions in Ukraine

* Swedish GDP surprise sends crown soaring

By Patrick Graham

LONDON, Feb 28 (Reuters) - A surprise blip higher in inflation drove the euro to its highest against the dollar this year on Friday, knocking back speculation of some sort of move to ease policy by the European Central Bank next week.

In a market that had been leaning towards a softer number that would at least leave the door open to action to lower euro zone interest rates and hence returns on the euro, even the minimal surprise of a figure of 0.8 percent versus the forecast 0.7 was enough to send the single currency sharply higher.

Still, the story of the past month on major currency markets has been of broad stability as a retreat of investors from emerging markets benefits safer bets like the euro, dollar, yen and Swiss franc across the board. That still looks intact.

"The euro certainly looks good, everything is in place for more gains. But I wouldn't race out and buy it at the moment," said Graham Davidson, FX trader with NAB in London.

"We've had a load of moves like this in the past month where it looks like currencies are breaking out higher and then after a day or two we see a retreat back into the same range."

Before the move on the euro, the day's dominant trend had been gains for the yen, investors' best choice as a safe haven from concerns over a weakening Chinese yuan and tensions in Ukraine. The Japanese currency was still 0.2 percent higher against the dollar in mid-morning trade, but had retreated 0.4 percent against the euro.

Strong Swedish growth numbers also propelled the crown around 1 percent higher against the euro.

"Clearly with what's happening in emerging markets, the yen is fulfilling its traditional role as a safe haven," said Neil Mellor, strategist with Bank of New York Mellon in London.

"The other side of that is that people are clearly using it to wind up the speculative trade we saw last year."

The yen was last year's major loser among the world's most traded currencies, down around a fifth in trade-weighted terms.


The yuan recovered some ground in European trade but still lost 0.87 percent for the week against the dollar, its biggest weekly loss on record.

Most western bank analysts are agreed that the moves by the People's Bank of China are aimed at squeezing out some of the speculative money that has banked on the yuan's steady rise against the dollar over the past decade.

That is expected to be followed by a widening of the band the bank lets the yuan trade in. The question is when and how weak the currency will be when that happens.

So far it has fallen around 1.4 percent against the dollar but around 4 percent against the euro - worse news for the German exporters who have profited massively from China's need for western technology and machinery.

"The move over the past week has caught a lot of people by surprise and that has injected a lot of volatility into the market," said Mellor.

"I think Chinese authorities are not just aiming to widen the band on the yuan with this move, I think they are also as concerned about growth and the aim here is to put a stop to the steady appreciation we have seen in recent years."

Where the market goes from here should largely depend on the next moves from the PBOC, which guides yuan offshore rates through tightly-controlled daily fixings in China. Davidson said he saw the threat the yuan fall could have some way to go.

"The market is still pretty short," he said. "There's a lot of structured plays in there and if it starts triggering some of the stop losses we could even see the offshore rate go to 6.30 or 6.40."

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