* European shares rise on ECB easing hopes
* Euro zone inflation in focus
* U.S. yields at 3-week low
* Ukraine unrest sours sentiment
By Jamie McGeever
LONDON, Feb 28 (Reuters) - European stocks rose on Friday, supported by expectations a low reading of euro zone inflation later in the day will force the European Central Bank to ease monetary policy further and a record high close on Wall Street the previous session.
But worries over the tense political situation in Ukraine limited these gains, helped fuel a safe-haven rise in the Japanese yen against the dollar and anchored benchmark U.S. Treasury yields near their lowest in three weeks.
“The inflation data could be a trigger for the ECB to cut rates again. In the second half of the year, you could also see the central bank start buying assets in the American style. These measures have the potential to favourably impact the market,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.
Economists polled by Reuters expect the “flash” annual inflation rate in the euro zone to fall to 0.7 percent in February from 0.8 percent. It could be even lower, some say, after German inflation on Thursday was weaker than forecast.
In early trading the FTSEurofirst 300 index was up 0.3 percent at 1,3498.14 points, with the index headed for its best month since July last year.
But some poor company earnings soured sentiment. Bayer , Germany’s largest drugmaker, fell 1 percent after posting a 3.1 percent decline in adjusted core earnings, while Austrian lender Erste Group dropped 7.5 percent after proposing to halve its dividend.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan rose a slender 0.1 percent for a 4 percent gain on the month. Tokyo’s Nikkei stock average skidded 0.5 percent.
Also in Asia, China’s yuan 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.
UKRAINE UNSTABLE, BUT NO MARKET “GAME CHANGER”
Investors also focused on the increasingly unstable situation in Ukraine. The United States told Russia to demonstrate in coming days that it was sincere about its promise not to intervene in Ukraine, as armed men stormed the regional parliament and hours later others seized the airport in a mainly ethnic Russian region.
The unrest prompted investors to seek the safety of U.S. Treasuries, pushing yields to more than three-week lows in Asia where the 10-year yield slipped to 2.638 percent. In early European trade it was around 2.64 percent, little changed from its U.S. close of 2.642 on Thursday.
“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 Gijsels at BNP Paribas Fortis Global Markets.
Equity and bond markets continued to draw support from Federal Reserve Chair Janet Yellen’s comments on Thursday that the U.S. central bank will continue to determine whether severe winter weather was behind recent signs of weakness. She re-emphasised that it would take a “significant change” to the economic outlook to sway the Fed from its plans to taper its stimulus.
Her overall testimony to the Senate was deemed to be market-friendly, fuelling a 0.5 percent rise in the S&P 500 to a record high close of 1854.29 points.
Low Treasury yields kept the dollar on the defensive. It fell 0.4 percent on Friday to 101.74 yen, after dropping as low as 101.55 yen, its lowest since Feb. 17.