October 25, 2017 / 11:38 AM / a year ago

GLOBAL MARKETS-Fed leadership talk lifts dollar, shares tread water

* Dollar gets boost on Taylor Fed Chair prospects

* Sterling lifted by forecast-beating UK GDP

* German business confidence rises to record high

* European shares tread water

By Ritvik Carvalho

LONDON, Oct 25 (Reuters) - The dollar got a lift on Wednesday after a report that Republican senators were leaning towards John Taylor to be the next Federal Reserve chief, while share markets turned flat after a run of highs.

On Tuesday, a source familiar with the matter said U.S. President Donald Trump had polled Republicans on whether they would prefer Stanford University economist John Taylor or current Fed Governor Jerome Powell to be the next U.S. central bank chief, and more senators preferred Taylor.

That helped send the dollar up to a three-month high against the yen at 114.24, while the index that measures its broader strength rose 0.1 percent.

The dollar was also supported by the yield on the U.S. 10-year Treasury. It was at 2.42 percent having finally broken above the long-standing 2.4 percent barrier this week.

For Fed-focused traders, Taylor is seen as someone who could quicken the pace of interest rate increases compared with Fed Chair Janet Yellen, whose term expires next February.

“The greenback remains firm, but the overhanging questions provide two-way risks over the coming few weeks – less so the FOMC (Federal Open Markets Committee) which looks locked in for a December rate hike, than on the progress of tax reform through Congress and the Fed Chair nomination,” said Saxo Bank’s head of FX strategy John Hardy.

Elsewhere in currencies, the Australian dollar dropped 1 percent to $0.7700, touching its lowest levels since mid-July after weak inflation numbers prompted investors to pare expectations of further tightening from the Reserve Bank of Australia.

The MSCI world equity index, which tracks shares in 47 countries, was flat as a muted gains in Europe counterbalanced earlier gains in Asia. Wall street futures were set to open lower.

MSCI’s broadest index of Asia-Pacific shares outside Japan ended the session up 0.1 percent as India, South Korea and Indonesia all hit record highs.

Sterling got a boost after data showed Britain’s economy picked up speed in the third quarter, bolstering the case for the Bank of England to raise UK interest rates next week for the first time in more than a decade. The pound rose almost 1 percent to $1.3255.

Fabrice Theveneau, head of Global Equities at Lyxor Asset Management, told Reuters: “I still believe the British economy will be on the verge of a recession at the end of 2018.”

He said that the figures were better than he had foreseen but that it did not change his views that the effects of Brexit on capital expenditure and a drop in EU immigration would gradually take their toll.

The pan-European STOXX 600 was up 0.3 percent. France’s CAC 40 rose 0.3 percent, while Britain’s FTSE 100 index fell 0.2 percent as sterling’s strength weighed. . Germany’s DAX rose 0.1 percent.

MSCI’s benchmark emerging stocks index rose 0.35 percent after two days of losses, with South Korean, Indonesian and Indian bourses hitting all-time highs.

The latter was helped by a surge in banking shares such as State Bank of India, Punjab National Bank and Bank of Baroda after the cabinet approved a $32.4 billion bank recapitalisation plan.

Euro zone banks were up 1 percent, building on the previous session’s gains as investors anticipated Thursday’s European Central Bank meeting for the next catalyst for financials, which benefit from a rising rate environment.

Recent indications from policymakers have fanned speculation it will opt for a reduction in monthly asset purchases to 30 billion euros from January from 60 billion euros at present. Bets are also that it will keep that in place for 6-9 months.

German business confidence unexpectedly rose to a record high in October after falling for two months in a row, a survey showed on Wednesday.

Crude oil futures caught their breath after rising more than 1 percent overnight after top exporter Saudi Arabia said it was determined to end a supply glut. Prices also drew support from forecasts of a further drop in U.S. crude inventories as well as nervousness over tensions in Iraqi Kurdistan.

Brent crude was up 0.1 percent at $58.41 a barrel, while U.S. crude was down 0.3 percent at $52.31.

Spot gold was down 0.2 percent at $1,273.70 an ounce.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Reporting by Ritvik Carvalho; additional reporting by Jemima Kelly and Helen Reid in LONDON, and Tokyo markets team; Editing by Jon Boyle and Hugh Lawson

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