Dollar flatlines ahead of Yellen, Draghi at Jackson Hole

[August 22, 2014]  By Marc Jones

LONDON (Reuters) - The dollar was steady on Friday after its strongest weekly run since March and world stocks were near all-time highs as markets waited for steers from the Federal Reserve and ECB on diverging policy plans.

European shares <.FTEU3> opened barely changed and heading for their biggest weekly gain since February, while Asian markets hitched a ride on another record close for Wall Street to end the week near a six-and-half-year high.

Emerging market stocks were also stronger but investors were beginning to move to the sidelines ahead of speeches by Fed Chair Janet Yellen and ECB President Mario Draghi at the annual gathering of central bankers in Jackson Hole, Wyoming.

Talk will focus on labour markets and economic prospects but traders will be listening for any clues about the timing of U.S. interest rate rises and how the ECB plans to tackle the euro zone's stubbornly low inflation.

"Everyone expects her to make another speech that the labour market isn't as rosy as the headline employment numbers suggest," Aberdeen Asset Management portfolio manager Luke Bartholomew said.
 

"We are all set up for her to be dovish, so the surprise would be if she wasn't."

With that uncertainty in mind, the dollar <.DXY> was hovering just below its 2014 peak against a basket of major currencies, as the euro at $1.3280 stayed just away from an 11-month low of $1.3242 struck on Thursday.

TALKING ABOUT JACKSON HOLE

Janet Yellen makes her first trip to Jackson Hole as Fed chair after U.S. data on Thursday showed home resales rose to a 10-month high in July, unemployment claims fell and a gauge of future economic activity grew solidly.

Kansas City Fed President Esther George said the time has come for higher U.S. rates, though less hawkish San Francisco Fed President John Williams said the bank should wait until next summer.

Rate hike-sensitive 2-year U.S. government bonds have seen their yields rise the most since March this week. In contrast, worries about the euro zone slipping towards deflation and near-zero growth pinned German 10-year government bond yields firmly below 1 percent on Friday. [GVD/EUR]

ECB President Mario Draghi is under pressure to use his last remaining tool -- printing money to buy huge amounts of bonds -- to tackle near-zero inflation but he is not expected to show any renewed urgency in that regard when he speaks later.

"The odds of QE in the near-term are relatively low," Pimco's European strategist and portfolio manager Myles Bradshaw said. "The market is thinking more about what will happen in 2015."

MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> ended within a few points of a 6-1/2 year while the main emerging market index <.MSCIEF> hit a three-year high.

It is perhaps surprising considering the tumble it took last May and in January when U.S. rate hike talk was also top of the agenda. But stocks in China have now risen for the last six weeks and Russia stocks have been on a rebound for the last two.

In commodities trading, spot gold <XAU=> rose 0.2 percent to $1,279.90 an ounce, after losing 1.3 percent on Thursday as rate expectations sent it ploughing through some key support levels to a two-month low.

U.S. crude <CLc1> was slightly higher at $93.98 a barrel, but still set to post a fifth straight weekly fall.

The sophistication, wealth and military might of Islamic State militants represent a major threat to the United States that may surpass that once posed by al Qaeda, U.S. military leaders said on Thursday. So far, however, the fighting has had little impact on oil supply.

(Editing by Louise Ireland)

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