(New throughout, updates prices, updates dateline)
* Norwegian inflation surprises, pushing crown almost 1 pct higher
* Yen off highs as investors become less cautious
* Investors watching geopolitical developments for cues
By Jemima Kelly
LONDON, Aug 11 (Reuters) - The Norwegian crown hit a seven-week high against the euro after Norway reported consumer inflation unexpectedly jumped in July, making it less likely the central bank will cut interest rates.
That took the focus away from a risk-on move in the European session which saw the yen backing off from the highs against the dollar it reached last week, when tensions in Ukraine and Gaza fuelled demand for the safe-haven Japanese currency.
The dollar was half a percent above a two-week trough of 101.51 yen that it had hit on Friday. It rebounded late last week on news that Russia was ending military drills near the Ukrainian border, helping U.S. stocks post their best one-day gain since March.
European shares also rose in early trade on Monday, bouncing back from a sharp two-week slide and tracking Wall Street’s rally.
The euro was flat at 136.73 yen, around 0.8 percent above an 8 1/2-month low of 135.73 set on Friday.
“It’s essentially a risk-on move that we’ve hit last night, which is a legacy of last Friday,” said Daragh Maher, a currency strategist at HSBC. “It’s playing in reasonably traditional fashion in currencies, with the likes of the Aussie higher and the yen weaker.”
The Australian dollar was flat against its U.S. counterpart at $0.9274, above a two-month low of $0.9239 hit on Friday.
The euro fell by 0.9 percent against the Norwegian crown to 8.2855 crown per euro after data showed core inflation jumping to 2.6 percent, ahead of the central bank’s 2.5 percent long-term target and a forecast of 2 percent in a Reuters poll.
“We would expect the Norwegian crown to bounce quite firmly from here, with markets likely to price out more of the some 10-13 basis points (of interest rate cuts being priced in)” said Josh O‘Byrne, a currency strategist at Citi.
In June, the Norges Bank suggested the possibility of a rate cut this year should the economic outlook weaken.
HSBC’s Maher warned that investors could quickly turn risk-averse again, given the volatility in Gaza and Ukraine.
“All these situations can turn around, so there’ll be reasonably low conviction in terms of these risk-on FX trades.”
In an overview of the years since the financial crisis on Monday, U.S. Federal Reserve Vice Chair Stanley Fischer said the U.S. and global recoveries have been “disappointing” so far and may point to a permanent downshift in economic potential.
Some thought Fischer would adopt a more hawkish tone after a run of more robust U.S. data. But despite a strong rebound in the second quarter, the U.S. growth for July-September remains uncertain.
The outlook for the global economy does not look bright enough to encourage strong risk-taking at this juncture, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
Japan’s economy might also struggle to bounce back in the third quarter after taking a hit in April-June from a consumption tax increase enacted in April, Murata said.
”The current situation isn’t as good as people had expected, and I think it’s difficult to expect risk appetite to strengthen.
“We think the dollar will continue to find it difficult to push higher versus the yen,” Murata said, adding that it was also notable that the U.S. 10-year Treasury yield was still hovering at levels roughly around 2.4 percent.
While the U.S. 10-year yield has pulled up from Friday’s 14-month low of 2.349 percent, it remains well below a recent peak near 2.69 percent touched in early July. (Additional reporting by Ian Chua and Masayuki Kitano; Editing by Larry King)