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Dollar hits seven-month high, stocks set for weekly rise

[October 21, 2016] By Alistair Smout

LONDON (Reuters) - Global stocks were set for their first weekly gain in four weeks on Friday and the dollar rose to its highest since March, as the euro came under pressure after the European Central Bank shot down talk of a tapering of its asset purchases.

The euro hit a seven-month low against the dollar after the ECB left its ultra-loose policy unchanged on Thursday but kept the door open to more stimulus in December.

ECB President Mario Draghi said the bank had not discussed winding down the 1.7 trillion euro asset-buying program at its policy meeting.

"Weaning markets off easy monetary policy will be a delicate exercise for the ECB, and we think the bank is unlikely to remove its stimulus until inflation is solidly on track to 2 percent," Andrew Bosomworth, managing director and portfolio manager at PIMCO, said in a note.

"We thus view tapering as a topic for 2017 and beyond."

The euro was down 0.4 percent at $1.0890 having earlier hit $1.0875, its lowest since March.

The dollar's index against a basket of currencies touched 98.606, its highest since early March and driven by hardening expectations of a U.S. interest rate rise in December.

China's offshore yuan fell to its lowest against the dollar in six years, while the dollar was down 0.2 percent at 103.71 yen after rising 0.5 percent in the previous session.

WEAK OUTLOOKS

World stocks were in line for their first week of gains since September.

The dovish ECB stance helped underpin appetite for European stocks. Equities have been more broadly boosted by a good start to the earnings season, with expectation-beating results from U.S. banks the highlight so far.

But the week was set to end on a soft note. The STOXX Europe 600 was flat, while U.S. e-mini futures fell 0.3 percent.

Microsoft was set to open at an all-time high after results, providing support to the Nasdaq, though elsewhere the picture was more mixed.

Some companies, including Daimler, have posted solid results but weak outlooks, and analysts queried whether the market's recent run was sustainable.

"This week held several positives for markets. The Q3 earnings season so far managed to surprise rather strong market expectations and solidified anticipations that the earnings recession has ended after four quarters," said Susan Joho, economist at Julius Baer.

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Traders react while working on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., September 15, 2016. REUTERS/Brendan McDermid

"As good as these developments may look at first sight, none of them are robust enough to be sustained in the next months. The reality looks more sober: corporate guidance is weak."

European equities posted a record 37th straight week of outflows, according to Bank of America/Merrill Lynch, and Europe Inc's third-quarter earnings are expected to see a double-digit decline, Thomson Reuters I/B/E/S/ data shows.

CRUNCH DEBT REVIEW

Sterling slipped 0.3 percent to $1.2211, taking in its stride comments by European Council President Donald Tusk that British Prime Minister Theresa May had confirmed that Brexit talks would be triggered by end-March 2017.

Weakness in the euro saw it slip to its lowest level versus the pound since a "flash crash" in sterling on October 7.

Portugal's government bond yields held just above six-week lows, with analysts expecting Lisbon to survive a crucial ratings review and keep its place in the European Central Bank's asset purchase scheme.

Oil edged higher as Russia reiterated its commitment to joining a producers' output freeze to stem a two-year slide in prices, turning higher after a strong dollar had knocked back prices overnight. Brent crude was last up 0.6 percent

Weakness in oil prices overnight contributed to falls in Asian equities.

MSCI's broadest index of Asia-Pacific shares outside Japan closed down 0.4 percent.

(Reporting by Alistair Smout; Editing by Toby Chopra and John Stonestreet)

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