* Sterling hits highest in year vs euro after UK data
* Chinese index rises 2.3 pct to 2-week high
* Australia inflation data hurts shares, lifts Aussie
* Portugal stocks plunge but periphery bonds extend gains
* Wall Street expect to open subdued
By Marc Jones
LONDON, Jan 22 (Reuters) - Sterling reached a 12-month high against the euro on Wednesday as falling unemployment in Britain focused attention on when U.K. interest rates would rise.
Chinese shares jumped after its central bank moved to ease lending-market tensions. That kept world stocks hovering near 5 1/2-year highs, though the mood soured in Europe as Portugal suffered its worst day since July.
Wall Street focused on another flurry of company earnings, including results from eBay and Netflix, and on ‘Redbook’ data. Futures prices pointed to 0.1-0.2 percent declines for the S&P 500 and Dow Jones benchmarks.
An upgrade of the International Monetary Fund’s world forecasts on Tuesday had initially lifted financial-market sentiment. A rally in government bonds from the southern euro zone also resumed.
But the UK took the spotlight. Another bigger-than-expected decline in unemployment, to 7.1 percent, provided more evidence of a fast-healing economy, improving the chances the Bank of England will raise rates soon.
Minutes from the central bank’s last meeting, released at the same time as the jobless data, showed policymakers now feel unemployment is likely to fall to 7 percent “materially earlier” than expected. That is threshold the bank has set for reviewing its policy.
The minutes sent sterling to its highest in a year against the euro, at 82.26 pence per euro, and pushed it up against the dollar. UK government bonds, or gilts, lost out as investors sought out higher-rewarding alternatives.
“It will certainly be the big challenge for Bank of England Governor Mark Carney and the MPC (Monetary Policy Committee) in managing the forward guidance,” said Michael Hewson, chief strategist at CMC Markets. “What does he do when it does hit 7 percent? ... I think the only way is up for the pound.”
The other big move in Europe came as Portuguese stocks suffered their biggest drop in seven month, falling more than 2 percent. Bank shares helped to lead the decline, falling almost 30 percent in some cases, after the government decided against a tax move that would have helped boost their capital positions.
With the U.S. Federal Reserve expected to make a second small cut to its stimulus programme next week, the dollar remained near a two-month high against a basket of currencies.
In Asian trading, Chinese shares jumped 2.6 percent after this week’s moves by China’s central bank. Its efforts to cool rising bank-to-bank borrowing costs continued to buoy a stock market recovery from a six-month low.
An upside inflation surprise also lifted the Aussie dollar as the prospect of an RBA rate cut faded. The Canadian dollar sagged near a four-year low on bets the Bank of Canada will be shifting towards an easier policy.
Emerging markets were also in focus again as political unrest flared back up in Thailand and Ukraine.
Ukraine’s hryvnia currency hit its lowest level against the dollar since October 2009 and the country’s debt insurance costs spiked after two demonstrators were shot during a new wave of anti-government protests in Kiev.
In Thailand, the shooting of a pro-government activist weakened the stock market and initially the baht. The currency recovered after the central bank resisted the temptation to cut rates.
“Thai financial markets are relatively calm for now. But if the political standoff drags on, then there will be delays in infrastructure investment and larger economic implications,” said Yukino Yamada, a senior strategist at Daiwa Securities.
Markets in Turkey steadied after a torrid few weeks. The lira steadied after plunging to a record low on Tuesday. Stocks rose 1.3 percent, heading for a third day of gains.
Among commodities, oil prices rose on expectations accelerating growth in industrialised economies will lift demand. U.S. crude futures rose 0.6 percent to $95.61 a barrel, their highest since Jan. 3.
However, growth-attuned copper dropped and iron ore fell to its weakest in more than six months as slow demand from top importer China hit sentiment.