* Euro pares losses on hawkish ECB Mersch comments
* Libya violence fuels risk aversion, helps USD, CHF
* New Zealand dollar suffers after earthquake
(Adds comment, details, updates prices)
By Jessica Mortimer
LONDON, Feb 22 (Reuters) - The euro was steady versus the
dollar on Tuesday as hawkish comments from a European Central
Bank official helped it pare earlier steep losses as escalating
tensions in Libya prompted investors to seek safer assets.
Risk aversion gripped markets, lifting the dollar and the
Swiss franc, after the defiance of Libyan leader Muammar Gaddafi
in the face of a mounting public revolt stoked uncertainty and
prompted a supply cut in one of the world's major oil exporters.
[]
The euro, which had earlier fallen as much as one percent
against the dollar, cut its losses, however, after ECB
policymaker Yves Mersch was quoted saying the central bank may
have to adjust its language on inflation. []
The ECB's Nout Wellink was also quoted expressing concerns
about inflation. []
These comments followed recent hawkish rhetoric from various
ECB officials, including policymakers Juergen Stark and Lorenzo
Bini Smaghi, which have highlighted the prospect of the ECB
raising interest rates sooner than previously thought.
However, analysts said any further escalation of troubles in
Libya or the Middle East could quickly encourage investors to
resume cutting exposure to riskier assets.
"There has been a sharp rally in euro/dollar on the Mersch
comments which caught the market the wrong way round, but it
looks overdone," said Ankita Dudani, G10 currency strategist at
RBS.
"Events in the Middle East and Libya are definitely on
everyone's radar and markets are becoming very wary of risk.
The euro <EUR=> was steady at $1.3673, well above an earlier
low of $1.3527.
The dollar was up 0.1 percent at 77.727 against a currency
basket <.DXY>, but it was well below the day's high of 78.326.
The Swiss franc was broadly firmer, with the euro <EURCHF=>
down 0.7 percent at 1.2864 francs, having earlier dropped as low
as 1.2793 francs, its weakest since late January.
Markets also become more risk-averse on news of an
earthquake that rocked New Zealand's second biggest city and
sent the New Zealand dollar to a near two-month low against its
U.S. counterpart. []
The euro cut losses against the yen, trading slightly up on
the day at 113.75 yen <EURJPY=R>.
OIL PRICE RALLY
Oil prices rallied to 2 1/2-year highs on fears the unrest
in Libya could spread to other major Middle East oil producers.
Higher oil prices are seen weighing on global growth,
particularly in emerging countries heavily dependent on oil and
commodity imports. Rising prices have already led to higher
inflation, which can threaten vulnerable economies.
However, analysts said any sign of a calming of the
situation could see the focus in FX markets switch back to
interest rate differentials.
"If the region stabilises and tensions don't spread beyond
Libya, and if there is a perception the region is going to be
under control ... I think we will return to the risk-on,
monetary policy-driven trade," said Audrey Childe-Freeman, head
of EMEA FX strategy at JPMorgan Private Bank.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic on market reactions to Libya turmoil:
http://r.reuters.com/zen28r
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Big moves in the spot market cranked up implied volatility
in major currencies, with euro one-week vols jumping above 11
percent <EUR1WO=R>.
The New Zealand dollar <NZD=D4> tumbled more than 2 percent
on the day to $0.7469, its weakest since late December. It was
last down 1.6 percent at $0.7509.
Market participants said the currency extended losses after
Westpac Bank said New Zealand's central bank may cut rates to
shore up confidence, adding that a rate cut may occur at or
before a policy meet next month. []
(Additional reporting by Naomi Tajitsu; editing by Stephen
Nisbet)
