* European shares erase gains, turn negative
* Euro tops $1.38 for first time this year
* Euro zone inflation holds steady
* Ukraine unrest sours sentiment
By Jamie McGeever
LONDON, Feb 28 European stocks reversed course
and fell on Friday, and the euro rose to its highest level this
year after an unchanged reading of euro zone inflation cooled
growing expectations the European Central Bank could ease
monetary policy as early as next week.
The "flash" estimate of annual consumer price inflation in
February was 0.8 percent, wrong-footing economists who had
anticipated a slip closer to deflationary territory with a
consensus forecast of 0.7 percent.
The dimming prospect of an interest rate cut from the ECB as
early as its next policy meeting next week hit banking stocks
hard, pushed the euro above $1.38 and lifted government bond
yields from their lows earlier in the session.
This took the shine off stocks, which had also drawn support
earlier in the day from the record high close on Wall Street the
previous session following what were deemed market-friendly
comments from Federal Reserve Chair Janet Yellen.
Instead, investors pointed to the political unrest in
Ukraine as another excuse to retreat and lock in profits on the
last day of what has been a profitable month.
"There could be some disappointment on the basis that the
ECB could step back from any action that it could have been
considering next week to see how things pan out," said Keith
Bowman, equity analyst at Hargreaves Lansdown.
"There are still a lot of nerves in the background,
particularly with regard to the geopolitical situation (in
Ukraine). But the market does seem to be seeing good support and
with every dip in prices, buyers are coming in," he said.
At 1130 GMT the FTSEurofirst 300 index was down
0.41 percent at 1,339.88 points, having traded in positive
territory up until the inflation data release. The index is on
track for a gain of 4 percent in February.
In Asia, MSCI's broadest index of Asia-Pacific shares
outside Japan rose a slender 0.19 percent for a
4 percent gain on the month. Tokyo's Nikkei stock average
skidded 0.5 percent.
The euro was 0.6 percent higher on the day at $1.38,
reaching that level for the first time this year, while the
dollar pared its losses against the Japanese yen to 101.90 yen
CHINA AND UKRAINE
Currency traders also digested large moves in China's yuan
, which posted its biggest weekly loss in two decades
as the central bank ramped up its intervention to weaken the
currency ahead of a key government meeting.
"Some are wondering whether the PBoC (People's Bank of
China) will step in to stabilise the yuan, but reports have been
suggesting that the central bank is indeed trying to shake out
speculators who have put on the renminbi carry trade," Deutsche
Bank strategists wrote in a note on Friday.
Aside from the euro zone inflation figures, the increasingly
unstable situation in Ukraine was the main focus for investors
Armed men stormed the regional parliament and seized the
airport in a mainly ethnic Russian region, Ukraine's acting
president dismissed the head of the armed forces general staff,
and the central bank imposed caps on the withdrawal of foreign
currency from the country's banks.
The unrest prompted investors to seek the safety of U.S.
Treasuries, pushing yields to more than three-week lows in Asia
of 2.638 percent. That had risen to 2.67 percent
after the euro zone inflation data, however.
"Ukraine is a political risk. As long as the markets are
convinced that Russia is not going to take a hard stance on the
issue, it is something to watch but not a game changer," said
Philippe Gijsels, head of research at BNP Paribas Fortis Global
Markets in Brussels.