European stocks gain, dollar strong as traders cut Fed easing bets

LONDON:  European stocks were on track to race ahead of Wall Street on Friday, with exporter shares in high demand as the continent's major currencies dropped against a dollar standing tall on bets the U.S. Federal Reserve would keep interest rates high.

Europe's broad Stoxx share index (.STOXX), opens new tab, rose 1.1% on Friday morning as a weak euro flattered the domestic value of exporters' dollar earnings.

London's FTSE 100 (.FTSE), opens new tab was 1.3% higher, boosted by global mining and oil stocks.  Futures markets implied Wall Street's S&P 500 share index, which is on track for its second weekly drop, would open 0.1% lower, while Nasdaq 100 futures dropped 0.3%.

MSCI's all-country equity index was steady, on course for its second weekly fall after hotter-than-expected consumer price data mid-week forced traders to sharply pull back on U.S. rate-cut bets. Money-market pricing implied investors expect the Fed to reduce its main funds rate by about 45 bps this year.

U.S interest rates are at a 23-year high of 5.25%-5.5% and traders started 2024 betting on about 150 bps of cuts.  "In the near term it is going to be harder for the Fed to cut than for the European Central Bank," said Marcelo Carvalho, global head of economics at BNP Paribas.

The U.S. labour market is strengthening and its economy is outshining global peers, while euro zone inflation is dropping towards the ECB's 2% target as growth and bank lending in the euro currency bloc weaken.

"Investors are starting to wonder if the Fed will be able to cut at all this year," Barclays analyst Anshul Pradhan said. First, explain to us producer prices, the same as wholesale prices or not.

The dollar index rose 0.5% on Friday to 105.82, taking the U.S. currency's weekly gain against a basket of major peers to 1.5%. Japan's yen touched a 34-year low of 153.34 per dollar as traders waited for signs that authorities in Tokyo might intervene to strengthen the flailing currency.

The ECB and the Bank of England are predicted to begin reversing their own historically aggressive monetary tightening efforts sooner, in a trend that has weighed on the euro and sterling this week.  The ECB on Thursday strongly signalled it would lower its main deposit rate from a record 4% in June. The euro touched a five-month low of $1.0674 on Friday.

Sterling , previously a popular carry trade currency for speculators who believed the BoE would cut after the Fed, slid to $1.2508, also a near five-month lowFed officials, by contrast, said on Thursday there was no urgency to ease. Boston Fed President Susan Collins commented that the strength of the economy and an uneven retreat in inflation argued against a near-term push to lower rates.

Long-term U.S. Treasury yields , which act as a benchmark for valuations of riskier assets like stocks, on Friday traded at 4.54%, up 16 bps this week and having risen from less than 3.9% in January as the price of the debt fell. Investors in U.S. government debt have since early 2023 banked on gains from falling interest rates.But according to Bank of America, the 10-year annualised return from Treasuries now stands at just 0.6%, a 65-year low. The yield on the interest-rate sensitive two-year German bond was 8 bps lower on the day at 2.89%.

Economists have also queried whether the ECB would cut in June but then remain cautious about diverging from Fed policy too much to prevent the euro weakening to the point higher dollar-denominated import costs could re-stoke inflation. "Beyond June, the ECB is keeping its options open," Deutsche Bank economists said in a note to clients. "The risk is skewed towards the ECB easing less quickly."

Elsewhere, MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 1%. Gold climbed to a record $2,397.1, bringing its gain this week to 2.9%. Crude oil prices rose after Iran said it would retaliate for a suspected Israeli airstrike on its embassy in Syria. Brent crude futures added 1% to $90.60 a barrel, while U.S. West Texas Intermediate crude futures gained 1.1% to $85.99.