Euro at three-month high, bond yields key
The euro hit a three-month high against the dollar on Thursday, lifted by another lurch higher in euro zone government bond yields that again kept global stock markets in check.
Investors digested figures from the previous day that showed relatively strong euro zone economic growth in the first quarter, contrasting with disappointingly weak U.S. retail sales in April.
The euro shot above $1.14, bringing its gains against the U.S. currency in the last month to nearly 9 percent as the difference between benchmark U.S. and euro zone 10-year yields shrinks from the euro-lifetime high touched in March.
European stock markets clawed back opening losses on Thursday but struggled to make much headway, with investors worried about volatility and the tightening of financial conditions resulting from the spike in yields.
Asian stocks were broadly flat but Japan's Nikkei 225 index fell 1 percent. U.S. futures pointed to a positive opening on Wall Street thanks to the dollar's slide to a four-month low.
"The euro rally has continued today despite more stable German bond markets, suggesting the move is being driven by a weaker dollar," Barclays wrote in a note on Thursday.
"European equities are broadly stable but the downtrend that started in mid-April remains in place."
The euro was up two-thirds of one percent on the day at $1.1430, as the U.S.-German 10-year yield spread narrowed to a three-month low of 151 basis points. In mid-March, the dollar's yield advantage over the euro was 193 basis points.
This pulled the dollar index, a measure of its against a basket of six currencies, down to a four-month low of 93.133.
With higher U.S. interest rates seeming ever more distant, investors bailed out of long dollar positions, taking the index's losses to around 7 percent from a 12-year peak of 100.390 set in March.
Wednesday's weak U.S. retail sales report prompted investors to push back the likely lift-off date for a rate hike by the Federal Reserve, giving gold a steer to five-week highs above $1,219 an ounce.
But this failed to reverse the bond selling, which has gathered startling momentum over the past month.
The rise in yields has made equities look more expensive in comparison to debt and kept global share markets subdued. Australian, Singaporean and Thai stocks declined, while Chinese and South Korean shares posted modest gains.
At mid-session in Europe, the FTSEuroFirst 300 index of leading European shares was flat on the day , Germany's DAX was up slightly and Britain's FTSE 100 was little changed . All three indices had been deeply in the red for most of the morning
"The bond market moves are making investors quite anxious," said Oanda senior market analyst Craig Erlam.
In bonds, the yield on German 10-year paper rose as high as 0.778 percent, closing in on the 2015 high of 0.799 percent touched last week. It was last at 0.762 percent, still up on the day.
The 10-year Treasury yield was flat on the day at 2.29 percent, notably slightly above Wednesday's five-month closing high of 2.28 percent.
While Fed officials keep insisting a rate hike could come from June onward, markets are not convinced the U.S. central bank will be able to move at all this year.
Bond and currency moves are likely to be the main market driver on Thursday, but investors will also keep close tabs on talks between Greece and its creditors.
Finance Minister Yanis Varoufakis said on Thursday Greece's debt was not viable and repayments to the European Central Bank should be pushed back.
ECB president Mario Draghi will deliver a speech to the International Monetary Fund in Washington later on Thursday.
In commodity markets, oil recovered from an opening dip to trade more firmly. U.S. crude futures were unchanged on the day at $60.49 a barrel, while Brent was up 18 cents at $66.99.