Shares rise, dollar frozen ahead of Fed rate decision

[September 16, 2015]  By Marc Jones

LONDON (Reuters) - World share markets rose on Wednesday, albeit in thin volume, and short-term U.S. bond yields held near 4 1/2-year highs as investors braced for the possibility of the first interest rate hike in the United States in almost a decade.

A late 5 percent surge in Chinese stocks had helped Asia's bourses finish more than 2 percent higher as early gains of 0.7 to 1.3 percent for London's FTSE, Frankfurt's DAX and Paris's CAC 40 got Europe of to a solid day too.

Markets remained in a state of flux on the likelihood of a rate increase by the Fed at its two-day meeting starting later in the day, and U.S. economic data published on Tuesday did little to either back, or douse, expectations of one.

Inflation data is due in both the U.S. and Europe and with both likely to show it remains barely visable in either region as it has for over a year now, that is unlikely to sway many opinions either.

All the uncertainty left the dollar in frozen animation against the world's other main currencies having rebounded from Monday's three-week low of 95.125 to stand at 95.600. But it is essentially staying within its well-worn range of the last few weeks.

The euro traded at $1.1261 while the dollar inched down fractionally against the yen to 120.27 yen.

"It's more a day for thinking about tomorrow," said Kit Juckes, head of currency strategy at Societe Generale in London.

"Positions are coming off rather than going on. We have seen the front end (short-dated U.S. government bond yields) rally but it hasn't really sent the dollar roaring."

Emerging market currencies remained under pressure near multi-year lows against the dollar amid worries that higher U.S. interest rates could lure away foreign investors again.

ROUBLE RALLY

However some of those hardest hit in recent months, like Russia's rouble, Turkey's lira and Mexico's peso made notable gains as traders squared up in case of any Fed related surprises.

The rouble was up almost 1.5 percent against the dollar and 1.7 percent against the euro.

Oil prices also helped as it extended gains made on Tuesday. Brent climbed more than 1 percent to $48.32 per barrel and U.S. crude hit $45.27, as an unexpected stockpile drawdown reported by the American Petroleum Institute (API) on Tuesday set expections for official crude inventory data later..

Gold was languishing near 1-mth lows ahead of the Fed meeting at $1,108 an ounce, though industrial metals including copper, nickel and tin made more minor gains as their slight recovery of the last few weeks continued.

China shares had provided a boost too, as they saw a strong rally in the last hour of trading to end up 5 percent. Hong Kong's Hang Seng index jumped in tandem to close 2.4 percent higher.

Bond markets were largely biding their time ahead of the Fed. U.S. Treasuries' yields sagged having jumped on Tuesday, with the policy-sensitive two-year yield rising to 0.815 percent, its highest level since April 2011.

It last traded at 0.7822 percent.

The 10-year U.S. notes' yield stood at 2.2616 percent, having risen to a 1-1/2-month high of 2.294 percent on Tuesday, while yields in benchmark European markets also dipped as the ECB stressed its openness to more money printing.

"The total amount that we have purchased represents 5.3 percent of the GDP (gross domestic product) of the euro area, whereas what the Fed has done represents almost 25 percent of the U.S. GDP, what the Bank of Japan has done represents 64 percent of the Japanese GDP and what the U.K. has done 21 percent of the UK’s GDP," Constancio told Reuters in an interview.

"So we are very far from what the major central banks have done," Constancio, 71, said. "This is not a benchmark ...(but) there is scope, if the necessity is there."

(Reporting by Marc Jones; editing by Ralph Boulton)

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