GLOBAL MARKETS-Euro dips in pre-ECB jockeying, U.S. yields bolster dollar

Wed Jun 4, 2014 8:26am EDT

* European shares dip as higher U.S. yields counter ECB
easing hopes
    * Nikkei bucks trend in Asia, climbs to fresh 2-month
closing high
    * Dollar bobs at 3-1/2 month high, euro dips back to $1.36
    * Gold near 4-month low, EM currencies pegged back by U.S.
yields

    By Marc Jones
    LONDON, June 4 (Reuters) - The dollar bobbed near a 3-1/2
month high and shares dipped for a second day on Wednesday as
the recent jump in U.S. borrowing costs and soft European data
set markets up for what is expected to be an action-packed ECB
meeting.
    Safe-haven gold was stuck near a four-month low,
while there were also signs of pressure building again on
emerging markets that suffered badly from rising U.S. rates
earlier in the year. 
    Shares in Europe sagged 0.2 percent as a slowdown
in the euro zone's economic recovery in the first quarter was
confirmed on Wednesday and figures showed businesses were still
having to cut their prices.    
    That left the euro limping along at $1.3617 against a
resurgent dollar, driven up by a near 20 basis point rise
in 10-year U.S. Treasury yields since last week.
    Futures prices also pointed to a subdued start for
Wall Street, already near a record high, where attention will be
on ADP private sector jobs data ahead of Friday's non-farm
payrolls reading. 
    "What is interesting across the market is that U.S. rates
are higher," said John Hardy, head of FX strategy at Saxo Bank
in Copenhagen. "We've seen the 10-year Treasury yield zip back
above the 2.5 percent level and it has been quite a significant
move these last few days." 
    "Emerging market currencies backing up again and it is also
pushing dollar/yen higher so there is a very interesting
sub-plot developing outside of the ECB."    
    Markets are wagering that the European Central Bank will
respond to the euro zone's low inflation and sluggish growth
concerns with an aggressive set of easing measures at its
monthly policy meeting on Thursday.
    As well as a new record low for euro zone interest rates,
the list could include a negative deposit rate - effectively
charging banks to park spare cash with the ECB overnight - plus
a new round of cheap loans and even asset purchases.
    "The world is expecting a little bit too much from the ECB
on Thursday," said Neil Williams, chief economist at London fund
manager Hermes. "(ECB head) Draghi has over-promised so the
question is whether he now under-delivers."    
   
    
    TREASURY YIELDS
    Economists are increasingly convinced that, in contrast to
the euro zone, stronger U.S. economic growth will allow the
Federal Reserve to raise interest rates next year.
    The diverging path has taken the gap between 2-year German
market rates and their U.S. equivalent to the widest in four
years, though German yields steadied on Wednesday as Berlin
avoided a third successive uncovered bond auction. 
    Benchmark U.S. Treasury yields edged up to
almost 2.6 percent as New York trading began. The dollar index,
which tracks the greenback against a basket of six major rivals,
lost a bit of momentum, but at 80.556 was within touching
distance of its highest level since mid-February.
    In Asia, Tokyo's Nikkei had hit a fresh two-month high on a
weaker yen and pension reforms, though action elsewhere
was muted as a 1 percent slide in Chinese shares 
compounded the U.S. rate jitters.    
    There was a squeeze on emerging markets. The Indonesian
rupiah led a wave of Asian currencies lower as it hit a near
four-month trough. Further south, the Australian dollar 
leapt a quarter of a U.S. cent after first quarter growth
figures beat forecasts.  
    "The market still operates on the assumption that Fed
tightening would be detrimental to emerging markets," said Jan
Dehn at fund manager Ashmore. "It's a bit like the way five-year
olds play football, where everyone just rushes in one direction
after the ball." 
    
    NOT SO PRECIOUS GOLD
    Ukraine and the tensions between the West and Russia were
also back in the spotlight.
    Visiting Poland, U.S. President Barack Obama voiced his
support for Ukraine's West-leaning president-elect Petro
Poroshenko and in Berlin, German Chancellor Angela Merkel said
she wouldn't hesitate to impose fresh sanctions on Russia if
Ukraine was destabilised. 
    In commodities trading, gold was steady at $1,245.10
an ounce after plumbing a four-month low of $1,240.61, while oil
 added about 0.7 percent to $103.43 a barrel as industry
data showed a bigger-than-expected fall in U.S. crude stocks.
    U.S. jobs data on Friday could help determine whether the
rise in Treasury yields will continue. The U.S. non-farm
payrolls report for May is expected to show that employers added
218,000 jobs, according to the median estimate of 105 economists
polled by Reuters. 
     "I think (gold) prices will stabilise here for a short
while around $1,245 before making another big jump either way,"
said a gold trader in Hong Kong. "People are mostly waiting for
Friday's payrolls data before taking any big positions."

 (Additional reporting by Lisa Twaronite in Tokyo; Editing by
Catherine Evans)
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