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

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* 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.

CHINA IN HAND

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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