Dollar holds near four-year highs, European equities slip

By Reuters

Sep 26, 2014 06:07 AM EDT

The dollar held near a four-year high against a basket of currencies on Friday, fueled by the biggest yield advantage over the euro in nearly 15 years as the Federal Reserve contemplates hiking interest rates.

European equities fell to trade close to a one-month low as a sharp sell-off in U.S. and Asian markets prompted caution among investors on the last trading day of the week.

U.S. stocks ended sharply lower on Thursday as Apple Inc APPL.O tumbled after the tech giant withdrew an update to its new operating system and as the dollar rose to a four-year high.

The dollar index .DXY, which tracks the greenback against a basket of major currencies, edged up about 0.1 percent to 85.278, not far from a four-year high of 85.485 hit on Thursday.

The dollar is on track for its 11th successive weekly rise, something it has not achieved in four decades.

"Its Friday and so we may see some consolidation but in general the dollar has broken through a number of long-term levels so there's scope for us to go further before we meet much resistance," said Neil Mellor, a strategist with Bank of New York Mellon in London.

"Against the euro we have a forecast in the low $1.20s for a year's time, but the way things are going we could get there fairly quickly."

It has been driven by the divergent monetary policy outlooks between a rate-hike contemplating Fed while the Bank of Japan and the European Central Bank are mulling further stimulus.

The yield difference between 10-year U.S. Treasuries US10YT=RR and German Bunds DE10YT=RR reached its widest in nearly 15 years on Thursday, keeping pressure on the euro. High bond yields tend to attract more fund inflows as bond investments account for a big chunk of international capital flows.

The euro was steady on the day at $1.2746 EUR=, after falling as low as $1.26955 on trading platform EBS on Thursday, its lowest since November 2012.


The dollar erased early losses and was about 0.3 percent higher on the day against its Japanese counterpart at 109.07 yen JPY=, though still shy of a six-year peak of 109.46 reached a week ago.

European equities were caught in Wall Street and Asia's downdraft, with the FTSEurofirst 300 index .FTEU3 of top European shares down 0.2 percent at 1,370.06 points after setting its lowest level in almost a month the previous day.

A rise in the U.S. currency also tends to make metals costlier for holders of other currencies and lowers demand for raw materials, which in turn could hit miners.

"We have seen continued strengthening in the dollar and there is growing uncertainty in the market about the U.S. tightening cycle," Ian Richards, global head of equities strategy at Exane BNP Paribas.

"We have got a great deal of policy uncertainty in the next couple of months. I would imagine that people's risk premium expectations will continue to drift higher and that will continue to put downward pressure on equity markets."

Spot gold XAU= added about 0.3 percent to $1,226.40 an ounce, after rebounding off Thursday's session low of $1,206.85 an ounce, which was its weakest level since Jan. 2. It looked set to snap a three-week losing streak, though dollar strength kept it in danger of breaking below $1,200 an ounce.

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