FOREX-Yen gains, euro dips as Ukraine tension hits markets

* Safe havens yen, Swiss franc bid as tensions in Ukraine heighten

* Participants also focused on U.S. data this week

* Euro softens but still within sight of two-month highs

By Patrick Graham

LONDON, March 3 (Reuters) - Major currency markets moved swiftly into wait-and-see mode over an increasingly fraught situation in Ukraine on Monday, calming after the yen and the Swiss franc were the main beneficiaries of an initial flight to traditional safe havens.

After soaring in Asia, the yen traded close to its strongest in a month against the dollar. It rose more than half a percent against the euro and analysts said the single currency might suffer further on any further escalation of tensions.

"Sell the euro against the yen would seem to be one play (on Ukraine), but that inflation number on Friday sent all the crosses spinning so we are left roughly flat," said a London-based dealer with one major U.S. bank.

"As a trader the best strategy is to be square and try and stay nimble when the headlines (from Ukraine) come out. We have to face the fact that this may run for a while."

The franc faded a touch after hitting more than one-year highs in Asian trade. There was no suggestion that the Swiss National Bank had intervened, but its long-held determination to cap the franc at 1.20 per euro tends to put a limit on any rise.

The euro also remained supported by a higher-than-expected euro zone inflation number on Friday which squeezed out many of those betting on more policy easing by the European Central Bank this week, possible through a reduction in interest rates.

Moscow dealers said Russia's central bank had sold up to $10 billion of its huge gold and foreign exchange reserves, to stem Monday's 2 percent fall for the rouble. One-month risk reversals - an indication of future moves - pointed to more weakness ahead.

Michael Sneyd, a strategist at BNP Paribas (Milan: BNP.MI - news) in London, said that he would normally expect central banks to sell dollars initially and only gradually even up the relative mix of their reserves, meaning less immediate impact on the euro, the other large element in Russia's foreign exchange holdings.

"They tend to sell down their dollar reserves and then adjust," he said. "Our view this morning was that it was probably worth looking to buy roubles from here. The bank's action has made rouble liquidity relatively scarce which limits the scope for a sell-off."

By mid-morning in Europe the euro was down 0.8 percent against the yen at 139.34, roughly equal to the opening on Friday. It fell 0.3 percent to $1.3764, retaining much of its gains after the inflation figures.

RISKS

Western powers have threatened to isolate Russia economically in the biggest confrontation with Moscow since the Cold War, raising a host of risks for Western Europe and the global economy.

The euro is the first safe port of call for capital from eastern European countries such as Poland, Latvia or Lithuania who may be the first to feel the fallout of any conflict or sanctions. But the euro zone also has close ties to Russia.

But the dollar, whose gains against the yen marked the biggest move on major currency markets last year, was also down around half a percent at 101.33 yen.

"The one to watch in our opinion is dollar/yen given the overall increase in political risk and the evidence of a slowdown in China," said Ian Stannard, strategist with Morgan Stanley (Shenzhen: 002588.SZ - news) in London.

"If risk does become more challenged there is room for a lot more movement there. We favour a shift to as low as 97 yen per dollar."

The Australian dollar hit one-month lows of 101.25 yen and 90.08 yen respectively overnight before recovering, with the slide in Tokyo shares adding an extra boost to the Japanese currency.

Dealing risk appetite a further blow, a government survey on Saturday (Shenzhen: 002291.SZ - news) showed activity in China's factory sector slowed to an 8-month low in February, reinforcing signs of a modest slowdown in the world's second-biggest economy.

A run of data, including the ISM manufacturing report on Monday and non-manufacturing report on Wednesday as well as factory orders on Thursday will give investors an opportunity to gauge the pace of U.S. growth and its potential implications for the Federal Reserve's plan to unwind its stimulus programme.