Europe stocks stumble, dollar lifted by U.S rate view

By Reuters

May 25, 2015 09:50 AM EDT

European shares fell in thin trade on Monday while the dollar powered ahead after U.S. Federal Reserve Chair Janet Yellen indicated that the central bank was poised to raise interest rates this year.

Investor concerns about Greece's debt problems and a poor regional and local election result by Spain's ruling People's Party also weighed on the euro and European shares.

The pull-back in European stocks mirrored losses on Wall Street on Friday after Yellen suggested the Fed was ready to act if the economy kept improving as expected, though a raft of recent data has suggested it is growing only modestly in the second quarter. She said delaying a policy tightening until employment and inflation hit its targets risked overheating the economy.

The benchmark French CAC 40 index shed 0.8 percent. Trading volumes were thin as several markets including Germany, the United Kingdom and the United States were shut for holidays.

Spain's IBEX equity index fell 2.3 percent after voters in regional and local elections on Sunday punished Prime Minister Mariano Rajoy's ruling PP for four years of austerity while Greece's ATG share index fell 2 percent.

"The Greek debt warning and the Spanish election outcome are weighing on the markets, said Naeem Aslam, chief market analyst at AvaTrade.

After four months of talks with its euro zone partners and the IMF, Greece's leftist-led Syriza government is still scrambling for a deal that could release up to 7.2 billion euros ($7.9 billion) in remaining aid to avert bankruptcy.


In foreign exchange markets, the dollar index, which measures the greenback against a basket of other major currencies, rose 0.3 percent to a one-month high of 96.475.

Against the yen, the dollar traded near a two-month high of 121.78, jumping from a low of 120.64 after Yellen's comments and as stronger-than-expected underlying U.S. inflation supported the Fed's case for an interest rate hike later this year.

Data on Friday showed the U.S. Labor Department's gauge on core consumer goods prices rose by 0.3 percent last month, bringing the year-on-year rise to 1.8 percent, the highest since October.

"I would expect rate expectations to continue to rise and for the dollar's uptrend to continue as a result," said Marshall Gittler, head of global FX strategy at IronFX Global.

The euro was weaker, falling to a one-month low of $1.0959 with some traders citing the victory of anti-austerity parties in Spain and Greece's financial crisis as factors.

In the most explicit remarks so far about the likelihood of default if negotiations fail, Greece's interior minister said Athens cannot make debt repayments to the IMF next month unless it manages to reach a deal with its lenders.

Oil prices dipped toward $65 a barrel as a rallying dollar and profit-taking took their toll.

Brent was down about 0.4 percent at $65.01 after dropping 2.1 percent for the week.

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