GLOBAL MARKETS-Dollar steadies after euro low, shares cling to weekly gains

Fri Oct 25, 2013 8:31am EDT

* Dollar near 2-year low vs euro, 2-week low vs yen

* European shares dip from 5-yr highs as rally fades

* Tokyo's Nikkei down 2.3 pct as yen rises, China weighs

* Aussie, kiwi dollars weak, Indonesia's rupiah surges

By Marc Jones

LONDON, Oct 25 (Reuters) - The dollar struggled to escape two-year lows against the euro on Friday as expectations of prolonged U.S. stimulus left it facing its sixth weekly fall in seven and world shares close to five-year highs.

Soft U.S. jobs and other data this week has bolstered the view that the Federal Reserve will not tamper with its huge bond-buying programme until well into next year, triggering a drop in the dollar and lifting both shares and bonds.

There was an interruption on Friday though as a surprise dip in Germany's Ifo business index and soft euro zone lending data sent another reminder of the bloc's fragility a day after a disappointing PMI reading.

Having hit a two-year high of $1.3833 overnight, the euro backed off to $1.3795 as European shares and southern euro zone government bonds also saw some selling.

"I think it is fairly clear the euro-dollar is pretty well bid but we did have the weaker PMI data yesterday too and it serves as a reminder that the ECB is likely to remain dovish," said Jane Foley, FX strategist for Rabobank in London.

"The softer data as well as the possibility for headlines from the ECB's AQR (Asset Quality Review of banks) could see people really question whether euro has the momentum to hit $1.40," she added.

Given worries about tighter cash markets in China and the impact of the strong euro on company earnings, European shares had already been subdued before the data, and an acceleration in British third quarter GDP did little to change the picture.

Underscoring the concerns about the strong euro, French insurer AXA and carmaker Renault blamed it for a drop in sales, while electrical goods maker Schneider cited it as it lowered its full-year forecasts.

There was little sign of sympathy from the ECB in Frankfurt though.

"In nominal and real effective terms, which is what counts most, we are in a range we have seen in the last 10 years," Joerg Asmussen, one of its top policymakers, told Il Sole 24 Ore.

PROFIT TAKING

It was a choppy day though, and the FTSEurofirst300 was almost back to where it started the day ahead of the Wall Street restart with U.S. stock futures pointing to a steady open.

U.S. data later includes the September durable goods report at 1230 GMT and the closely-watched Michigan sentiment index at 1355 GMT, the first since the disruption from this month's budget tussle and government shutdown in Washington.

For MSCI's world share index, which tracks 45 countries, the uncertainty meant a third straight weekly rise was in the balance, though with it at a five-year high and stimulus still in abundance there were few concerns.

"We think the trend is still upwards and we have markets rising next year," said Robert Parkes and equity strategist at HSBC. "I think what is critical is that earnings growth turns positive."

DOLLAR STEADIES

As the dollar clambered off its lows, sterling failed to keep hold of gains despite data showing UK growth accelerated to 0.8 percent in the third quarter from 0.7 in Q2.

In Asia, the Indonesian rupiah gave back almost half of its early 2 percent gains while the Aussie dollar was firmly on the back foot at a near session low of $0.9594.

MSCI's broadest index of Asia-Pacific shares outside Japan had eased 0.35 percent, reversing earlier slight gains as rising Chinese money market rates continued to overshadow signs of a pick-up in manufacturing.

Shanghai shares hit their lowest levels in a month, while Tokyo's stock market suffered its first weekly drop in three and high-flying Korean stocks edged lower.

The dollar was also pushing up against the yen as U.S. trading started, standing at 97.37 compared with a two-week low of 97.15 yen hit on Wednesday.

The dollar index, which tracks a basket of major currencies, was also in positive territory at 79.277 while benchmark U.S. Treasury yields were steady.

After what has been a choppy week for commodities markets, U.S. crude prices held above their recent 3-1/2 month low at $97 and copper slid towards its third weekly drop in four.

Gold meanwhile paused at $1,337 an ounce on its way to a second weekly gain. Bullion tends to do well from super-easy Fed money as it boosts its demand as an inflation hedge.

"We are certainly seeing some support this week, which is mainly due to external factors like the weakness of the dollar and dropping yields as the market tries to assess whether we will have tapering in coming months or not," said Credit Suisse analyst Karim Cherif.