LONDON The dollar held at a five-week low and gold headed for its best month in over 1-1/2 years on Friday, after a report that the U.S. Federal Reserve will next week underline its intention to keep interest rates low for a long time.
Moves by Fed officials to soothe concerns about its stimulus withdrawal plans have seen the dollar tumble this month as financial markets have bounced back strongly from June's mild bout of panic.
Wall Street was expected to see falls of 0.3-0.4 percent in the S&P 500 and Dow Jones when trading resumes, with the University of Michigan sentiment index set to broaden the view after this week's heavy slate of company earnings. .N
Setting the greenback on its latest fall was a Wall Street Journal report that the Fed may debate tweaking its forward guidance message to hammer home its signal that it will not be raising rates any time soon.
Against a basket of currencies .DXY it was down 0.2 percent but starting to claw back having earlier hit a 5-week low, while gold, often viewed as a hedge against Fed money-printing, consolidated its 10 percent rise this month.
The dollar's slide began on July 10, when minutes of the Fed's June meeting gave investors second thoughts about when the bank would start reducing stimulus and focus is now on next week's two-day meeting that ends on Wednesday.
"We could see more squaring of long dollar positions (ahead of the Fed meeting) keeping the downward pressure on the dollar," said Niels Christensen, currency strategist at Nordea in Copenhagen.
The dollar's weakness left the euro near a five-week high and eyeing $1.33, while a flurry of merger activity in the media sector not enough to fend off the currency's pressure on European shares .FTEU3 as early gains turned to minor losses.
Falls of 0.2 percent on London's FTSE .FTSE to 0.5 percent on Frankfurt's DAX .GDAXI left the pan-regional FTSEurofirst 300 .FTEU3 and EURO STOXX 600 indexes facing the prospect of their first weekly drop in over a month.
Nevertheless, it was a milestone day for Europe, marking one year since ECB President Mario Draghi's "Whatever it takes" speech that turned the tide in the euro zone debt crisis.
Most euro zone government bonds were slightly lower, but it was otherwise a quiet day for debt markets that last year were in panic mode amid fears the euro could implode. <GVD/EUR>
Italy and Spain have seen their 2-year bond yields fall from 5 and 6.4 percent, respectively, before Draghi's speech to under 2 percent, saving them immense amounts in interest payments, but it is euro zone bank shares that have been the biggest winners.
The STOXX 600 euro zone bank index .SX7E is up 56 percent and France's Credit Agricole (CAGR.PA) and Spain's Bankinter (BKT.MC) have surged nearly 150 percent, while Italy's UniCredit (CRDI.MI) has risen 74 percent.
"Draghi's speech was a real game changer. Investors' perception of the euro zone dramatically changed, and many people stopped shorting Europe. The systemic fears about Europe's debt crisis are gone," said Pierre-Yves Gauthier, head of strategy at AlphaValue, in Paris.
The 0.2 percent dip in European shares ahead of the U.S. restart added to the earlier 3 percent drop in Tokyo's Nikkei .N225 and left world stocks .MIWO00000PUS flat at the end of what has otherwise been their strongest month in almost two years.
With both the Fed and the European Central Bank meeting next week, plus some significant political events in Europe including Spanish prime minister Mariano Rajoy facing questions in a corruption scandal, BNP Paribas economist Ken Wattret said investors were likely to remain cautious.
"You look at the equity markets and the data in the U.S. and Europe has been good yet we are flat, so that probably tells you that we have had a good run and there is a bit of a pause going on," he said.
Gold had also sagged by 1215 GMT. It edged back to $1,324 an ounce but this month's 10 percent jump has been its best run since January 2012, albeit from a near three-year low. <GOL/>
Elsewhere in commodity markets, Copper prices dropped 1.4 percent to $6,900 a tonne. They had snapped a five-day winning run on Thursday, on concerns that a slowing Chinese economy may dent demand from the world's top consumer.
Brent crude prices also fell, dipping 0.7 percent to around $107.15 a barrel and 1 percent lower for the week.
"We have a shift in sentiment towards demand concerns following Chinese economic data this week," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.
"Oil ought to be benefiting from the weaker dollar and strengthening U.S. economy, but that is not the theme today."
(Additional reporting Blaise Robinson in Paris and Jessica Mortimer and Christopher Johnson in London; Editing by Toby Chopra)