Euro and sterling gain in calmer end to wild week



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Dollar now down 2.7% from Wednesday's high

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FX markets calmer but analysts doubt it will last

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Focus on euro zone inflation data

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Talk of yuan intervention aids Chinese currency

LONDON/TOKYO, Sept 30 (Reuters) - The euro and the sterling hit new one-week highs on Friday, buoyed by Bank of England steps to reassure markets and hawkish signals from the European Central Bank as some calm returned to foreign exchange markets at the end of a wild week.

The British currency was headed for its best week against the U.S. dollar in 2 1/2 years as the BoE waded into the debt market to buy gilts for a second day on Thursday. On Monday, the pound hit a record low after the British government's plan to slash taxes and pay for it with more borrowing rattled markets.

Heated German and Dutch consumer inflation data also served as a reminder that the job of the ECB, BoE and other central banks is not done, with the figure for the wider 19-country euro zone due later on Friday.

The pound touched $1.1222 GBP=D3 early in the Asian session, taking it very close to erasing all of the precipitous losses in the aftermath of the new government's so-called mini budget last Friday. It was last at $1.1155, up 0.3%.

The euro traded at $0.9837, up 0.2% EUR=EBS , while the dollar index =USD was unchanged but is down 2.7% from Wednesday's high.

Foreign exchange volatility has surged this week as investors worry about the pace of global monetary tightening and the UK mini-budget fallout, and while nerves calmed on Friday, few analysts think it is over.

"As cross-market volatility pushes up to new highs for the year, credit spreads widen and the market reflects on a near-miss with a financial crisis in the UK pension fund industry, it is probably time to take even more defensive positions in FX," ING strategists said.

"These will involve owning the Japanese yen on the crosses."

Elsewhere, China's yuan on Friday recouped all of its losses from earlier in the week after Reuters reported the central bank had told major state-owned banks to be ready to support the currency in offshore trading CNH=EBS .

The Swiss franc fell after the Swiss National Bank said it had intervened in the foreign exchange market in the second-quarter to support the currency. The franc was down versus the dollar CHF=EBS and the euro EURCHF=EBS .

The dollar was down 0.2% to 144.30 yen JPY=EBS , and has been mostly tracking sideways below the psychological 145 line since Japanese officials stepped in to conduct their first yen buying intervention since 1998 last week, when the dollar popped to a fresh 24-year peak at 145.90 yen.

Japan's government will confirm later on Friday the amount it spent on the intervention, and the amount it has left in reserve for further such action.

"Intervention concerns are definitely out there, and putting a lid on dollar-yen," said Shinichiro Kadota, a strategist at Barclays in Tokyo.



World FX rates Link



Reporting by Tommy Reggiori Wilkes and Kevin Buckland; Editing
by Robert Birsel

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