Sterling hits one-year high versus euro; rallies as dollar takes yen hit

LONDON, July 2 (Reuters) - The pound rose to a one-year high against the euro on Thursday and jumped against the dollar as swings in the Japanese yen caused currency markets to gyrate.

The euro slipped to 85.47 pence, its lowest since June last year, and was last down 0.2% against the pound.

Meanwhile, sterling rallied against the dollar and was last up 0.57% to $1.335, trading at its highest in two weeks.

Chris Turner, head of global markets at ING, said weaker-than-expected euro zone inflation data on Wednesday and an unwinding of bets against the pound were two possible factors in the euro's fall against sterling.

"There is probably also the view that UK politics may not come back to weigh on sterling until the end of this month or in August," he said. 

"Andy Burnham will probably take over as Labour's leader and UK PM on 20 July. The focus will then be on whether he appoints Ed Miliband as chancellor," he said, adding that such an appointment could weigh on the pound slightly.

Former Manchester mayor Burnham is widely expected to take over from the embattled current Prime Minister Keir Starmer late next month. 

Investors are waiting for more clarity about Burnham's policies, but the biggest driver of UK assets has been the U.S.-Iran deal and fall in oil prices, which has boosted market confidence and helped bond yields to fall.

Currency markets moved sharply on Thursday after the yen suddenly rallied, with traders on alert for signs of possible intervention from Japanese authorities to boost their currency, which is languishing at a 40-year low.

The market jitters hit the dollar, helping both the pound and the euro rally against the U.S. currency, which has been trading at around its highest in a year on bets that the Federal Reserve may have to raise rates to cool inflation amid a strong economy.

Key U.S. jobs data on Thursday could trigger a further swing in currencies should it sharply over- or under-shoot expectations.

Federal Reserve Chair Kevin Warsh said on Wednesday that inflation expectations and price risks had eased in recent weeks. 

Oil prices have fallen back to pre-war levels in the wake of the U.S. and Iran's framework deal.

(Reporting by Harry Robertson; Editing by Alexander Smith)