FOREX-Yen firms on Ukraine tensions, euro braces for inflation test

Reuters

* Safe-haven yen outperforms dollar and euro

* Euro wilts as tensions between Ukraine & Russia flare up

* Euro zone inflation a further risk after German CPI stays low

By Ian Chua

SYDNEY, Aug 29 (Reuters) - The safe-haven yen held firm early on Friday, while the euro was on track to post its second straight month of declines as tensions between Ukraine and Russia flared up again.

Ukraine's president said Russian troops had entered his country in support of pro-Moscow rebels who captured a key coastal town, sharply escalating a five-month-old separatist war.

The news short circuited a corrective bounce in the euro, sending the currency hurtling back towards a near one-year low of $1.3152. It was last at $1.3182, at least 40 pips below Thursday's intraday high.

The common currency is down 1.6 percent so far in August, following last month's 2.2 percent drop.

Against the Swiss franc, the euro skidded as far as 1.2049 , moving ever close to the 1.20 barrier that the Swiss National Bank has vowed to protect. It last traded at 1.2063.

Not helping the euro, data on Thursday showed Germany's annual inflation steadied at a very low level while Spanish consumer prices fell, suggesting there is a risk that the euro zone rate will come in lower than the 0.3 percent forecast.

Euro zone inflation is due later on Friday.

"Inflation is likely to set a new cyclical low of 0.2 percent, putting pressure on the ECB to take action. We now expect the ECB to cut both the refi and depo rates by 10 basis points next week," analysts at BNP Paribas wrote in a note to clients.

In contrast, revised data showed the U.S. economy rebounded more strongly than initially thought in the second quarter, with a bigger chunk of the growth driven by domestic demand.

The data only served to highlight the divergence in U.S. and euro zone monetary policy outlooks that should keep euro/dollar on a downtrend.

The pullback in the euro helped the dollar index edge up to 82.491, back towards its 13-month peak of 82.727 set on Wednesday.

Both the dollar and euro, however, eased against the safe-haven yen. The greenback dipped to 103.70, well off a recent high of 104.49, while the common currency reached a 2-1/2 week low of 136.42. The euro last stood at 136.71.

The Australian dollar, meanwhile, appeared to be marching to its own beat this month, rising against almost every other major currencies.

It has reached fresh 2014 peaks against the euro, yen and its New Zealand peer. Against the greenback, it is up 0.7 percent this month and in the middle of its 92-95 U.S. cent range seen for much of this year.

The Reserve Bank of Australia's steady policy stance and a recent set of reasonable data have kept Aussie bulls in play. But a major test looms.

There is a risk that gross domestic product data next Wednesday could show the economy shrank last quarter, the first time in three years. This could see the Aussie beat a hasty retreat, although it is likely to run into good support.

(Editing by Shri Navaratnam)

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