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GLOBAL MARKETS-Dollar drifts up as Greek worries weigh on Europe

* Greek debt worries, Ukraine conflict sap risk appetite

* China CPI hits 5-year low, reinforces sign of weakness

* Dollar on the rise again as yields nudge higher

By Marc Jones

LONDON, Feb 10 (Reuters) – Nerves over Greece’s future in

the euro and the conflict in Ukraine dragged on European markets

on Tuesday, while bets on the likelihood of a U.S. interest rate

hike nudged the dollar higher and oil prices held steady after a

rebound.

European stocks fell 0.3 percent and the euro slipped

towards $ 1.13 ahead of what is set to be a tense,

Greece-dominated meeting of euro zone finance ministers on

Wednesday.

The global disinflation/deflation story was also back on

investors’ radar as Chinese inflation fell below 1 percent to

its lowest in five months, drawing talk of further easing from

China’s central bank, the PBOC.

That had sent shares in Shanghai up more than 1 percent,

though other Asian stocks eased on more generalised risk

aversion.

Commodity price-dependent currencies such as the Australian

dollar and Norwegian crown ( EURNOK=) got a lift from

the talk of China stimulus, but for many traders the main focus

remained the dollar as it nudged up again.

“We are just wondering what the status is on this dollar

move as U.S. rates (bond yields) rise,” Saxo Bank’s head of FX

strategy, John Hardy, said.

“We had the big move on Friday after the strong jobs numbers

but then yesterday everything went quiet so hopefully it will

rally today to show that there is something behind it.”

On the strains on the euro, Hardy pointed out that markets

appear relatively pragmatic about a potential exit of Greece

from the 19-member currency bloc.

Although Greek markets have been hit hard – benchmark Greek

bond yields remain above 10.75 percent – the euro performed

relatively well against currencies other than the dollar. There

has been limited impact on Spanish and Italian bond markets.

Britain’s finance minister George Osborne, however, warned

on Tuesday that the risk of a “very bad outcome” was growing

between Greece and the euro area. Britain is not a member but

trades heavily with Europe.

STIMULUS, OIL

Asian share markets had ended mostly lower with Japan’s

Nikkei down 0.8 percent and shares in Australia and

South Korea also off, leaving MSCI (NYSE: MSCI – news) ‘s broadest index of

Asia-Pacific shares outside Japan down 0.25

percent.

Chinese inflation data had again shown signs of weakness in

the world’s No. 2 economy as consumer price inflation hit a

five-year low of 0.8 percent year-on-year in January.

It adds to a huge global trend which is pressing central

banks in many parts of the world to lower interest rates or turn

to unconventional policy stimulus again.

“This will likely be the low point for CPI (Other OTC: CPICQ – news) inflation given

that oil is rebounding. Still, the data will increase rate cut

expectations and we see a cut in March,” Credit Agricole senior

economist in Hong Kong, Dariusz Kowalczyk, said.

According to a draft communique from leaders of the Group of

20 (G20) countries meeting in Istanbul, they will pledge to act

decisively on monetary and fiscal policy, if needed, to combat

the risk of persistent stagnation.

The United States, however, strongly underlined at the

meeting that countries should not to use their currencies to try

to boost exports, one U.S. Treasury official said in a thinly

veiled reference to what is fast becoming a global currency war.

The dollar rose 0.15 percent to 118.78 yen, having

hit 119.23 on Friday in a rally triggered by robust U.S.

non-farm payrolls. It was also up 0.3 percent against the top

six world currencies.

Among commodities, safe-haven gold dipped and crude oil

snapped three days of gains after a survey showed that U.S.

commercial crude stockpiles hit a record high last week.

It jumped on Monday as OPEC forecast greater demand this

year than previously thought and projected less supply from

countries outside the producer group.

U.S. crude was down 1.3 percent at $ 52.45 a barrel

after gaining 2.3 percent overnight. Brent was 0.6

percent lower at 57.97 percent.

(Editing by Louise Ireland)

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