March 14, 2014 / 9:12 AM / 3 years ago

FOREX-Yen in vogue on renewed anxiety over Ukraine, China

* Yen benefits from safety flows

* Euro weighed down by comments from ECB's Draghi

* Focus back on Ukraine as Crimea referendum looms

By Anirban Nag

LONDON, March 14 (Reuters) - The yen was in demand on Friday, heading for its biggest weekly gain in more than a month against the dollar, underpinned by tensions in Ukraine and as worries about the health of the Chinese economy festered.

The euro was pegged back by a sharp ratcheting up of comments by European Central Bank policymakers about the exchange rate, which is near 2-1/2 year highs on a trade-weighted basis.

ECB President Mario Draghi said on Thursday that the strength of the currency was increasingly relevant to the bank's assessment of price stability as it was having a negative impact on inflation.

The euro was down 0.1 percent against the yen at 141 yen , unwinding all its gains made after the ECB held back from easing policy last Thursday despite projecting persistently low inflation. Draghi's comment then that the euro's strength had very little impact on imported inflation had helped the single currency rally to levels last seen in late 2011.

The euro slipped against the dollar to $1.3865, retreating from a 2 1/2-year high of $1.3967 struck on Thursday. But traders said the euro is likely to keep drawing support from the ECB's decision to keep policy unchanged, higher money market rates, and the euro zone's large current account surplus.

"The risks to global growth both from China as well as from the Crimean situation are supporting yen," said Manuel Oliveri, FX strategist at Credit Agricole. "The German stock market is underperforming due to worries that sanctions on Russia could have an impact on Germany and by extension on global growth."

Russia launched new military exercises near its border with Ukraine on Thursday, showing no sign of backing down on plans to annex its neighbour's Crimea region. U.S. Secretary of State John Kerry said serious steps would be imposed by the United States and Europe if the referendum on Crimea joining Russia takes place on Sunday as planned.

The dollar fell to 101.68 yen, retreating from Thursday's high of 102.865. On the week, the dollar has lost 1.5 percent, on track for its biggest losses since late January.

"In the near-term more risk-averse trading conditions may continue to encourage a stronger yen," Lee Hardman, a currency analyst at Bank of Tokyo Mitsubishi, wrote in a note.

"The Chinese economy appears to have downshifted to a slower pace of growth in the first quarter, as evident in the weak economic reports from February."

FRAGILE SENTIMENT

Market sentiment was already fragile after another batch of disappointing Chinese data on Thursday reinforced fears of a slowdown in the world's second-biggest economy.

Chinese Premier Li Keqiang warned on Thursday that the economy faced "severe challenges" in 2014 while expectations of more debt defaults kept alive worries about the state of its financial sector.

Commodity currencies, usually sold in times of heightened risk aversion, also came under pressure. That took the shine off the Australian and New Zealand dollars.

The Aussie last stood at $0.9025, having pulled back from a one-week high of $0.9104, while the kiwi was knocked back to $0.8535 from an 11-month peak of $0.8607.

Later in the day, investors will see if the U.S. producer price index and the University of Michigan sentiment index offer evidence that the economy is regaining strength, following solid retail sales and employment data on Thursday.

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