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FOREX-Norwegian crown firms; Yellen eyed for policy outlook

Patrick Graham
Monday, 10 Feb 2014 | 7:31 AM ET

* Norwegian crown jumps on price data

* New Fed chief with dovish history to testify in Congress

* Weak U.S. jobs data fails to deter Fed taper expectations

* Bank of England has chance to tweak guidance on Wednesday

LONDON, Feb 10 (Reuters) - Norway's crown stood out among G10 currencies on Monday, jetting almost 1 percent higher against the euro and dollar after higher than expected inflation was read as eliminating the chances of an interest rate cut.

The dollar, euro and yen were all broadly steady at the start of what may prove an important week for the timing of central bank policy moves in Britain and the United States.

The new head of the U.S. Federal Reserve, Janet Yellen, testifies in Congress after a second month of softer jobs data for which most investors seem to be blaming the weather rather than any weakening of economic recovery.

Yellen, long a supporter of the Fed's ultra-loose policy, must walk a line between maintaining enough support for the recovery and not spooking markets convinced the U.S. central bank will cease buying bonds by the end of this year.

That "tapering" is behind this year's main trend so far - a flood of money out of emerging economies and into the developed world and supporting the euro, dollar and yen, among others.

But that flow, possibly allied to the doubts over the pace of the U.S. recovery, has helped hold off the surge for the dollar that many have forecast and kept major currencies in tight ranges over recent weeks.

"Yellen likely will signal the Fed's intention to continue tapering, without sounding especially alarmed about the softer payroll reports of the past two months," analysts from French bank BNP Paribas said in a note.

"We remain constructive on the USD, but recognise that it may struggle to regain momentum in the immediate future."

GUIDANCE

Georg Von Wowern from Scandinavian bank Nordea said Norway's central bank would look past the inflation numbers, which were influenced by post-Christmas sales.

But he said the crown, which fell almost 15 percent last year against the euro, had been looking oversold and may have room to regain more ground.

"We continue to think the crown is vulnerable, but there is the possibility of more of a correction in the short term."

Norway's oil reserves have made its economy and assets pretty secure bets for years. But some analysts say bigger international investors who used it as a safe haven from the euro zone crisis in 2010-11 found its markets too thin to absorb the extra capital - or its withdrawal - easily.

"The current combination of lower risk appetite and global policy tightening is likely to weigh on the crown," said Ian Stannard, strategist with Morgan Stanley in London.

"We expect NOK to be an underperformer in 2014, with EUR/NOK ending the year at 8.55."

The currency gained 0.9 percent against the euro after the inflation numbers to trade at 8.3520 crowns per euro.

In Britain, an inflation report on Wednesday gives Bank of England Governor Mark Carney another chance to convince markets the bank's forecast that interest rates will be on hold well into 2015 are credible.

Analysts are split on whether Carney will formally tweak the bank's forward guidance on policy and whether it will work in pushing back market expectations for when rates will rise.

"There appears scope for UK short rates to decline and this is something that can also weigh on sterling," RBS strategist Paul Robson said. "However, we do not expect much follow-through."