FOREX-Inflation data boosts euro, Egypt fears ease a bit

                                
  
                                
 * Euro gains as euro zone inflation data tops estimates
                                
 * Sterling soars; Egypt unrest spreading still a risk
                                
 (Updates prices, adds comment, detail on U.S. data, Fed)
                                
By Steven C. Johnson
                                
 NEW YORK, Jan 31 (Reuters) - A jump in euro zone inflation
lifted the euro above $1.37 on Monday and bolstered the view
interest rates in the region could rise more quickly than in
the United States and other advanced economies.
                                
 That helped the euro reverse the losses it suffered on
Friday as unrest in Egypt drove up oil prices and sparked a
safe-haven bid for dollars and Swiss francs.
                                
 Asian central banks and some Middle East accounts were
among the most active euro buyers, traders said, and some said
the euro could renew a march toward $1.40 in the weeks ahead,
provided trouble in Egypt does not spread to other countries.
                                
 Brad Bechtel, managing director at FX execution firm Faros
Trading in Stamford, Connecticut, said inflation expectations
and month-end buying could drive the euro to $1.3750, adding
"$1.40 is still on the cards" if Egypt tensions die down.
                                
 While protesters filled the streets of Cairo for a seventh
straight day, investors seemed to take heart that violence and
disorder had at least not worsened. [ID:nLDE70U00B]
                                
 "After Friday, people anticipated coming in to chaos and
anarchy in Egypt. When that didn't happen, a lot of shorts were
caught wrong-footed," said Boris Schlossberg, director of
research at GFT Forex.
                                
 The euro rose as high as $1.3739 <EUR=> and was last up 0.6
percent at $1.3700. Overnight, $1.3570, the 50 percent
retracement of its November-to-January decline, acted as
support, bringimmng in buyers from Asia and the Middle East.
                                
 Sterling jumped 1 percent to $1.6014 <GBP=>, lifted by euro
gains in a reverse of Friday's losses. The euro also rose
against the Swiss franc <EURCHF=> and yen <EURJPY=>. The dollar
was down 0.2 percent at 81.96 yen <JPY=>.
                                
 Weekend reports that the European Union was working on a
solution to reduce Greece's debt burden also helped boost the
euro, traders said. [ID:nLDE70U087]
                                
 Schlossberg, however, said the potential for more unrest in
Egypt will make it "a tough slog" for the euro to break $1.40
or sterling to rise to $1.62 in the near term.
                                
 Crude oil <CLc1>, reflecting uncertainty about events in
Egypt, swung between gains and losses in New York before
pushing above $90 per barrel in late morning. It was some 4
percent above Friday's low.
                                
 INFLATION, EGYPT AND FED POLICY
                                
 Data showing euro zone inflation rose 2.4 percent in the
year to January, above the European Central Bank's 2 percent
target, boosted the view the ECB could hike rates sooner than
the Federal Reserve.[ID:nBRLVCE7AU]. ECB President Jean-Claude
Trichet has already warned about price pressures and is due to
speak Thursday after the ECB's monthly meeting.
                                
 The three-month Euribor rate <EURIBOR3MD=>, a mix of
interest rate expectations and banks' lending appetite, rose to
1.074 percent, the highest since July 2009. [ID:nEAP000437].
                                
 Citing a high U.S. jobless rate, the Fed has made it clear
it is not close to raising U.S. interest rates from near zero,
even as U.S. economic data has shown signs of improvement.
                                
 Data Monday showed U.S. consumer spending rose for a sixth
straight month in December, while business activity in the
Midwest grew more than expected this month. [ID:nN31151915]
                                
 The Commerce Department said Friday the economy grew 2.9
percent last year after shrinking by 2.6 percent in 2009.
                                
 Some worry that the Fed is underestimating inflation, and
emerging market officials have said Fed policy and a weak
dollar have worsened inflation outside U.S. borders.
                                
 Andrew Busch, global currency strategist at BMO Capital
Markets in Chicago, said higher food costs likely contributed
to the timing of unrest in Egypt and Tunisia.
                                
 "The potential risk is not over," he said. "Food inflation
will continue to drive global instability. Watch to see if
foreign politicians and central bank governors begin to ramp up
their criticism of Fed monetary policy, which is perceived as a
cause of global inflation."
                                
 If trouble in Egypt spreads to other Arab countries "and it
pushes up the oil price even more, then that would probably
spark more short-term flows into the dollar," said Karl Olsson,
currency strategist at SEB in Stockholm.
                                
 (Additional reporting by Jessica Mortimer in London;
Editing by Chizu Nomiyama and Andrew Hay)