June 28, 2017 / 12:46 AM / 25 days ago

Dollar falls as ECB, BOE turn hawkish; banks lead stocks up

5 Min Read

NEW YORK (Reuters) - The euro hit a one-year high against the U.S. dollar on Wednesday and the British pound rallied on bets that Europe's and Britain's central banks are preparing to scale back monetary stimulus, while bank stocks led a rebound on Wall Street.

The U.S. dollar index .DXY slid after Bank of England Governor Mark Carney said a debate on the need to raise interest rates is due "in the coming months," adding to a hawkish tone out of the European Central Bank on Tuesday.

Carney's remarks convinced traders that European monetary policy was shifting in a more hawkish direction, analysts said.

The monetary policy comments out of Europe and Britain after the U.S. Senate on Tuesday delayed a healthcare legislation vote initially expected this week, a move seen as pushing back the timeline for other items of President Donald Trump's agenda, including a tax overhaul regarded as essential to support lofty stock valuations on Wall Street.

"Prospects for infrastructure spending and tax reform are fading by the minute" after the delayed healthcare vote, said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.

Bank stocks helped boost the benchmark S&P 500 stock index as the interest rate-sensitive group was helped by a steepening yield curve.

Lender shares continued to rise in late trading after the Federal Reserve approved plans from the 34 largest U.S. banks to use extra capital for stock buybacks and dividends among other purposes.

The Dow Jones Industrial Average .DJI rose 143.95 points, or 0.68 percent, to 21,454.61, the S&P 500 .SPX gained 21.31 points, or 0.88 percent, to 2,440.69 and the Nasdaq Composite .IXIC added 87.79 points, or 1.43 percent, to 6,234.41.

The pan-European STOXX 600 index lost 0.04 percent with gains in bank shares limiting the loss, while MSCI's gauge of stocks across the globe .MIWD00000PUS gained 0.60 percent.

Emerging market stocks lost 0.45 percent. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS closed 0.32 percent lower, while Japan's Nikkei .N225 lost 0.47 percent.

Analysts said comments by ECB President Mario Draghi on Tuesday, seen as hawkish, continued to support the euro even as sources said on Wednesday that he had intended to signal tolerance for a period of weaker inflation, not imminent policy tightening.

“There is a bigger story here that has to do with the repricing in general of monetary policy expectations,” said Alvise Marino, FX strategist at Credit Suisse in New York.

A U.S. five dollar note is seen in this illustration photo June 1, 2017.Thomas White/Illustration

"There is a bit of a concern in the markets about the fact that the balance of monetary policy expectations is moving a little bit in a more hawkish direction in Europe, and you've seen that with the BOE, you've seen that with the ECB."

The dollar index .DXY fell 0.35 percent, with the euro EUR= up 0.34 percent to $1.1376.

Sterling GBP= rallied against the greenback off of Carney's comments and was last trading at $1.2925, up 0.87 percent on the day.

The Japanese yen strengthened 0.04 percent versus the greenback at 112.34 per dollar.

Oil futures climbed more than 1.0 percent to their highest in over a week after a small weekly decrease in U.S. production more than offset a surprise build in crude inventories in the world's top oil consumer.

U.S. crude CLcv1 rose 1.38 percent to $44.85 per barrel and Brent LCOcv1 was last at $47.64, up 1.53 percent on the day.

The back end of the U.S. Treasury yield curve rose after Carney's comments.

The ECB and BoE "are talking about tightening sooner or later so that definitely got the market's attention," said Dan Mulholland, head of Treasuries trading at Credit Agricole in New York.

U.S. benchmark 10-year Treasury notes US10YT=RR were down fell 9/32 in price to yield 2.2279 percent, from 2.198 percent late on Tuesday.

The 30-year bond US30YT=RR last fell 25/32 in price to yield 2.7803 percent, from 2.744 percent on Tuesday.

Spot gold XAU= added 0.2 percent to $1,249.06 an ounce. U.S. gold futures GCcv1 gained 0.22 percent to $1,249.70 an ounce.

Copper CMCU3 rose 0.36 percent to $5,879.00 a tonne.

Additional reporting by Sam Forgione, Karen Brettell, Lewis Krauskopf and Scott DiSavino; editing by Meredith Mazzilli and Nick Zieminski

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