* Euro extends rise in the wake of ECB comments on inflation
* Sterling gains after BoE minutes
* Middle East/North Africa situation remains a worry
(Updates prices, detail)
By Jessica Mortimer
LONDON, Feb 23 (Reuters) - The euro and sterling rose versus
the dollar on Wednesday, buoyed by expectations that interest
rates in the euro zone and UK will rise sooner than U.S. rates,
a factor that is likely to keep the greenback under pressure.
A UK rate hike in the coming months looked more likely after
minutes to the Bank of England's February policy meeting showed
a third policymaker voted for a hike while others would consider
one if UK economic recovery resumed. []
Traders said prospects of higher inflation and interest
rates took centre stage in currency markets, pushing aside
concerns about political tensions in North Africa and the Middle
East. Still, analysts said the market was wary and the dollar
could see renewed safety bids if unrest in the region spreads
and oil spikes higher.
ECB officials Yves Mersch and Nout Wellink said on Tuesday
they were ready to fight inflation by raising rates when needed,
prompting rate futures to price in a 25 basis point hike in
August. [] [] <ECBWATCH>
"The interest rate story is the main driver for euro and
sterling as market players try to price in the fact that rate
hikes may be starting earlier than previously expected," said
Stephan Maier, currency strategist at Unicredit in Milan.
ECB President Jean-Claude Trichet is due to speak later on
Wednesday and market players will be looking to see whether he
adds to the hawkish tone of Mersch and Wellink.
The euro <EUR=> was up 0.6 percent at $1.3736. Market
players said the euro was supported by earlier buying by Asian
central banks and by real money selling of dollars following a
drop in U.S. Treasury yields the previous day.
However, some traders said the single currency could succumb
to profit taking, with Asian central banks also reported leaving
offers at $1.3740-50. The euro was down 0.1 percent against the
pound <EURGBP=D4> at 84.55 pence as investors priced in chances
that the BoE will start raising rates sooner than the ECB.
Sterling was up 0.7 percent at $1.6243 <GBP=D4>, though it
was off a high of $1.6275 just after the BoE minutes, with
traders wary of pushing the currency too much higher due to
concerns about a fragile UK economy. <BOEWATCH>
Against a basket of currencies, the dollar <.DXY> was down
0.4 percent at 77.456, near an earlier three-week low of 77.411
and well below a high of 78.326 hit on Tuesday.
MIDDLE EAST, LIBYA TENSIONS
The euro faced resistance around the Feb. 9 peak at $1.3745.
A clear break of $1.3750 could open the way for more gains, with
the next major resistance seen at $1.3862, a three-month peak
hit in early February.
Tuesday's ECB comments caused the euro to bounce sharply
from Tuesday's low of $1.3525, when unrest in Libya caused oil
prices to spike, prompting investors to cut risk exposure and
lifting safe-haven flows into the dollar and Swiss franc.
The euro and perceived higher-risk currencies remained
vulnerable, however, to any worsening of tensions in North
Africa and the Middle East. Oil prices have firmed on concerns
the unrest may spread to other oil-producing nations. []
Global stocks were also lower, although U.S. stock futures
<SPc1> pointed to a firm start on Wall Street.
"There are still a lot of uncertainties in North Africa, but
the impact tends to wane if there is no new news," said Niels
Christensen, currency strategist at Nordea in Copenhagen, but he
added that markets would keep a close eye on oil prices.
A defiant Muammar Gaddafi, Libya's leader, said on Tuesday
he would not be forced out by the deadly unrest sweeping
Africa's third-largest oil producer. []
Rising oil prices kept a lid on the yen <JPY=> with the
Japanese economy vulnerable due to high oil imports. Dollar/yen
was up 0.1 percent at 82.81 yen, with talk of decent-sized
option expiries at 82.90 and 83.00 yen for later on Wednesday.
The New Zealand dollar was flat at $0.7469, having hit a
two-month low of $0.7433 <NZD=D4> after Tuesday's deadly
earthquake raised concerns about the economy. Those concerns
were seen reducing the likelihood of rate rises this year and
could even prompt the central bank to cut rates. []
(Additional reporting by Anirban Nag)
(Editing by Susan Fenton)
