* Dollar edges lower after Flynn resigns over Russian contacts
* Sterling hit by inflation numbers
* Yellen to testify to Congress on Tuesday, Wednesday
* French election concerns continue to plague euro (Recasts with sharp fall in sterling, more quotes)
By Yumna Mohamed
LONDON, Feb 14 (Reuters) - The dollar stumbled against major currencies on Tuesday as investors reined in any expectations for a March rise in U.S. interest rates and U.S. President Donald Trump’s national security advisor Michael Flynn quit in a row over Russia.
The euro inched up by 0.2 percent and the yen gained around a third of a percent in morning trade in Europe, while sterling was the biggest mover - down more than half a percent after lower-than-expected inflation numbers.
That all pushed the dollar index back from three-week highs, down just over 0.2 percent after Flynn’s resignation added to a week which has seen Trump change tack or soften his message on a number of foreign policy fronts.
Investors worry that points to a less cohesive White House that may struggle to implement the promises of “phenomenal” tax reform and public investment that sent the dollar and U.S. stock markets spiralling higher after Trump’s elections.
The prospect of a surge in inflation has spurred expectations of rises in U.S. Federal Reserve interest rates this year. But any expectations of one next month have been trimmed ahead of Fed chief Janet Yellen’s testimony in Congress on Tuesday.
“We’re still early into the new administration so we’re yet to get details of fiscal strategy and that’s going to have an important impact on how the Fed guides policy,” said Simon Derrick, chief market strategist with BNY Mellon in London.
The euro rebounded over 0.7 percent against sterling after the latter was hit by weaker-than-expected inflation data that added to some recent worrying numbers for the British economy.
Consumer prices rose at the fastest pace since June 2014 last month, driven by higher global oil prices and the Brexit vote-fuelled fall in the pound’s value, the official data showed.
But possibly as much of a concern going forward will be the sharp rises in costs which British producers are having to swallow due to rising world oil prices and the 20 percent slump in sterling over the past year.
That comes at a time when political risk is also beginning to weigh on the euro. There were also worrying dips in German growth data and sentiment surveys on Tuesday.
“The euro is being propped up by real weakness in the pound which is allowing it to maintain its gains against the U.S. dollar,” said Kathleen Brooks, research director at City Index.
“While the weaker pound is helping to lift the euro, we also saw weak data out of the euro zone today which might show that the European recovery story has hit the skids,” she said.
The euro, which has come under pressure in recent sessions from France’s presidential election campaign and Greek bailout talks, benefitted from dollar weakness and was up 0.2 percent at $1.0616.
Dallas Federal Reserve Bank President Robert Kaplan, a voter this year on the Fed’s policy-setting panel, said on Monday in remarks prepared for posting to the Dallas Fed website that the U.S. central bank should act soon to raise rates or risk having to abandon its plan to do so slowly.
However, interest rate futures show investors pricing in less than a 1 in 6 chance the Fed will increase rates at its meeting next month, according to CME Group’s FedWatch program.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Yumna Mohamed; Editing by Angus MacSwan