* Euro gains after above-forecast euro zone inflation data
* Euro supported by Middle East buying, Asian sovereign bids
* Investors stay wary of Egypt unrest spreading
By Jessica Mortimer
LONDON, Jan 31 (Reuters) - The euro rose against the dollar
on Monday as above-forecast euro zone inflation kept alive the
view that interest rates in the region may rise sooner than
previously thought.
The data helped the euro recover from losses resulting from
safe-haven buying of dollars, as well as Swiss francs and yen,
due to unrest in Egypt. Analysts said gains for these currencies
may be limited unless the trouble spreads to other countries.
Traders cited Middle East accounts buying euros against the
dollar, lending further support after data showed euro zone
inflation rose to an annual rate of 2.4 percent in January from
2.2 percent in December, exceeding forecasts for a 2.3 percent
rise. []
"(European Central Bank President Jean-Claude) Trichet has
warned of a hump in inflation, this data shows a rise in
inflation and the market has reacted to it," said Kit Juckes,
currency strategist at Societe Generale.
"Important though Egypt is, the troubles there were more a
catalyst for a correction in risk appetite rather than the onset
of risk aversion," he added.
The euro was up 0.3 percent against the dollar at $1.3653
<EUR=>, keeping it away from an intraday low of $1.3570 hit on
trading platform EBS.
The low roughly corresponds with the 50 percent retracement
of the euro's November to January fall and could provide
short-term support, technical analysts said, while traders cited
Asian sovereign bids at $1.3570-80.
Euro zone inflation is well above the ECB's target to keep
the rate below but close to 2 percent and will keep intact
support for the euro based on the view that the European Central
Bank will raise interest rates much sooner than the U.S. Federal
Reserve.
Trichet has recently emphasised the need to monitor any
short-term rise in inflation in order to avoid second round
effects.
The euro also rose against other currencies which had gained
as investors sought safety due to the Egypt unrest. Against the
Swiss franc it was up 0.5 percent at 1.2896 francs <EURCHF=>,
while it gained 0.4 percent to 112.24 yen <EURJPY=>.
MIDDLE EAST WORRIES
With street protests in Egypt showing no sign of abating,
however, investors remained wary that political upheaval could
hit other Arab countries, potentially disrupting oil production
and heightening tensions in the region. []
"The euro saw a blip down against the dollar, but it may be
that we have seen the worst of it and the market's attention may
turn elsewhere," said Karl Olsson, currency strategist at SEB in
Stockholm.
"But if the trouble really spreads and it pushes the oil
price up even more, then that would probably spark more
short-term flows into the dollar".
The Egyptian crisis was seen having the potential to
overshadow economic events this week which include a slew of
data such as U.S. non-farm payrolls and central bank decisions.
The dollar index <.DXY> was down 0.2 percent at 77.975, off
a high of 78.325. The U.S. unit was up 0.1 percent at 82.19 yen
<JPY=> and up 0.2 percent at 0.9440 Swiss francs <CHF=>.
The higher-yielding Australian dollar <AUD=D4> was steady at
$0.9933, off a low of $0.9866, supported by gains in commodities
which helped to offset increased risk aversion.
Data showed speculators increased bets against the U.S.
dollar and in favour of the euro in the latest week, but they
also scaled back net long positions in the commodity-linked
Canadian, Australian and New Zealand dollars. []
(Editing by Stephen Nisbet)
