The dollar rose to its highest since January against the yen and the
euro sank to a one-year low against the greenback as another drop in
euro zone producer prices heightened speculation about what the ECB
will do when it meets on Thursday.
With U.S. markets closed for Labor Day, investors in Asia had been
somewhat subdued, but the mood in Europe seemed brighter as trading
settled into a rhythm.
Britain's FTSE, Germany's DAX and France's CAC 40 were up 0.3, 0.8
and 0.4 percent respectively to lift the pan-regional FTSEurofirst
300 back towards a 6 1/2-year high. Even shares in Moscow steadied
after three straight days of falls.
"It is never a straight line, so it is a bit of a breather and a
pause (in Ukraine-Russia tensions), but I continue to be concerned
by this situation," said Benoit Anne, an emerging markets strategist
at Societe Generale. "And we all wait for the ECB, of course, this
week. That is a major consideration and that will probably send a
bullish signal to risky assets."
Bond markets have been one of the big beneficiaries of expectations
the ECB will loosen policy to revive the euro zone's flagging
economy, and traders cashed in some of those gains before Thursday's
Dovish comments by ECB President Mario Draghi late last month led to
bets the central bank is preparing to pump more liquidity into the
system, possibly via purchases of government or corporate bonds, a
measure known as quantitative easing (QE).
Sources from at ECB told Reuters last week new action at its meeting
this Thursday was unlikely but not impossible, and the barrier to QE
was still "very high".
Fresh data showed a drop in energy prices pushed down euro zone
producer prices again last month, leaving them 1.1 percent lower
than they were at the same time a year ago. It was the steepest
annual drop since April, and the report caused the euro to tumble as
low $1.3109, after starting the session around $1.3123
IHS Global Insight economist Howard Archer called it "more worrying
news on the inflation front for the ECB," although core inflation,
which strips out volatile elements like energy, has not dropped
In Asian trading, Chinese stocks gained for a third day and Tokyo's
Nikkei rose 1.2 percent, its biggest jump in almost a month. A
planned cabinet reshuffle by Japanese Prime Minister Shinzo Abe
helped to fuel reform hopes.
The dollar was boosted by the flagging euro and by gains in Tokyo
shares that reduced demand for the safe-haven yen. The U.S. currency
rose to a seven-month high of 104.87 yen and reached a 14-month high
on the heavily traded index of currencies.
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"The dollar's gains are driven by actual flows, such as
options-related buying. The market is also keeping an eye on the
rise in equities," said Shinichiro Kadota, chief Japan FX strategist
at Barclays Bank in Tokyo.
With U.S. markets preparing to reopen after the long weekend, focus
was on the ISM's report on U.S. manufacturing due later in the day,
which might suggest the U.S. is ready to phase out quantitative
easing just as the ECB considers adopting it. Futures prices pointed
to Wall Street opening up around 0.3 percent.
"This week may start to mark the biggest shift in global monetary
policy since 'Abenomics' went into full steam on the appointment of
Haruhiko Kuroda to head up the BOJ," equity strategists at Jefferies
wrote in a note to clients.
Elsewhere, the Australian dollar showed little reaction to the
widely expected decision by the Reserve Bank of Australia to keep
its cash rate at a record low 2.5 percent for the 12th consecutive
meeting. The Aussie was down 0.4 percent at $0.9296 after brushing a
one-week low of $0.9285.
In commodities, Brent crude held steady below $103 a barrel on
Tuesday, with unrest in OPEC oil producer Libya balanced by concern
demand for oil will slow as economic recoveries in China and Europe
Palladium hovered near the 13 1/2-year high of $910 an ounce it
reached overnight on fears that Western sanctions will curtail
supply from Russia, the world's biggest producer of the metal. Spot
palladium last traded at $903 an ounce. Gold nudged down as risk
(Additional reporting by Shinichi Saoshiro in Tokyo; Editing by
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