GLOBAL MARKETS-Fed stimulus debate leaves dollar at 5-week low

Fri Jul 26, 2013 8:49am EDT

* Dollar hovers near five-week low vs basket of currencies
    * Wall Street seen opening down 0.3-0.4 pct
    * Gold dips but heads for best month in 1-1/2 years
    * World shares dip after Nikkei fall but set for bumper
month

    By Marc Jones
    LONDON, July 26 (Reuters) - The dollar held at a five-week
low and gold headed for its best month in over 1-1/2 years on
Friday, after a report that the U.S. Federal Reserve will next
week underline its intention to keep interest rates low for a
long time.
    Moves by Fed officials to soothe concerns about its stimulus
withdrawal plans have seen the dollar tumble this month as
financial markets have bounced back strongly from June's mild
bout of panic.
    Wall Street was expected to see falls of 0.3-0.4 percent in
the S&P 500 and Dow Jones when trading resumes,
with the University of Michigan sentiment index set to broaden
the view after this week's heavy slate of company earnings. 
    Setting the greenback on its latest fall was a Wall Street
Journal report that the Fed may debate tweaking its forward
guidance message to hammer home its signal that it will not be
raising rates any time soon.
    Against a basket of currencies it was down 0.2
percent but starting to claw back having earlier hit a 5-week
low, while gold, often viewed as a hedge against Fed
money-printing, consolidated its 10 percent rise this month.
    The dollar's slide began on July 10, when minutes of the
Fed's June meeting gave investors second thoughts about when the
bank would start reducing stimulus and focus is now on next
week's two-day meeting that ends on Wednesday.    
    "We could see more squaring of long dollar positions (ahead
of the Fed meeting) keeping the downward pressure on the
dollar," said Niels Christensen, currency strategist at Nordea
in Copenhagen.
 
 
    SUPER MARIO
    The dollar's weakness left the euro near a five-week
high and eyeing $1.33, while a flurry of merger activity in the
media sector not enough to fend off the currency's pressure on
European shares as early gains turned to minor losses.
    Falls of 0.2 percent on London's FTSE to 0.5 percent
on Frankfurt's DAX left the pan-regional FTSEurofirst
300 and EURO STOXX 600 indexes facing the
prospect of their first weekly drop in over a month.    
    Nevertheless, it was a milestone day for Europe, marking one
year since ECB President Mario Draghi's "Whatever it takes"
speech that turned the tide in the euro zone debt crisis.
    Most euro zone government bonds were slightly lower, but it
was otherwise a quiet day for debt markets that last year were
in panic mode amid fears the euro could implode. 
    Italy and Spain have seen their 2-year bond yields fall from
5 and 6.4 percent, respectively, before Draghi's speech to under
2 percent, saving them immense amounts in interest payments, but
it is euro zone bank shares that have been the biggest winners.
    The STOXX 600 euro zone bank index is up 56 percent
and France's Credit Agricole and Spain's Bankinter
 have surged nearly 150 percent, while Italy's UniCredit
 has risen 74 percent.
    "Draghi's speech was a real game changer. Investors'
perception of the euro zone dramatically changed, and many
people stopped shorting Europe. The systemic fears about
Europe's debt crisis are gone," said Pierre-Yves Gauthier, head
of strategy at AlphaValue, in Paris. 
    
    GOLD SHINES
    The 0.2 percent dip in European shares ahead of the U.S.
restart added to the earlier 3 percent drop in Tokyo's Nikkei
 and left world stocks flat at the end of
what has otherwise been their strongest month in almost two
years.
    With both the Fed and the European Central Bank meeting next
week, plus some significant political events in Europe including
Spanish prime minister Mariano Rajoy facing questions in a
corruption scandal, BNP Paribas economist Ken Wattret said
investors were likely to remain cautious. 
    "You look at the equity markets and the data in the U.S. and
Europe has been good yet we are flat, so that probably tells you
that we have had a good run and there is a bit of a pause going
on," he said.
    Gold had also sagged by 1215 GMT. It edged back to
$1,324 an ounce but this month's 10 percent jump has been its
best run since January 2012, albeit from a near three-year low.
 
    Elsewhere in commodity markets, Copper prices 
dropped 1.4 percent to $6,900 a tonne. They had snapped a
five-day winning run on Thursday, on concerns that a slowing
Chinese economy may dent demand from the world's top consumer.
    Brent crude prices also fell, dipping 0.7 percent to
around $107.15 a barrel and 1 percent lower for the week.
    "We have a shift in sentiment towards demand concerns
following Chinese economic data this week," said Carsten
Fritsch, senior oil analyst at Commerzbank in Frankfurt.
    "Oil ought to be benefiting from the weaker dollar and
strengthening U.S. economy, but that is not the theme today."
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