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Dlr up, bonds dip as Fed cut expectations fade

LONDON - The dollar rose while euro zone government bonds dipped on Thursday in the wake of stronger US inflation data and Federal Reserve minutes which suggested ebbing prospects for a US rate cut.

European shares were firm, fuelled by forecast-beating results from European heavyweights. Oil and gold eased but sentiment on crude stayed bullish on supply concerns following closure of a fuel pipeline in top consumer the United States.

Investors were unruffled by the surprise resignation of Italian Prime Minister Romano Prodi on Wednesday, after a foreign policy defeat in parliament, with no discernable impact seen in European markets.

Data on Wednesday showing an unexpected pick-up in US core consumer prices in January supported the dollar, prompting market players to rethink expectations that the Fed would cut interest rates later this year.

The minutes from the Fed’s Jan. 30-31 meeting on Wednesday also suggested top central bank officials were less certain that inflation was firmly on a downward path.

The Fed felt last month that stronger-than-expected economic news had trimmed risks to growth and was unsure price pressures were clearly receding.

“The (Fed minutes) suggest that the path of least resistance for now would be for the Fed to stay on hold,” Bank of America currency strategist Kamal Sharma said.

The euro was down almost 0.4 percent on the day at $1.3090, while the dollar firmed 0.2 percent to 121.22 yen.

Debt markets sensed the hawkish tone on inflation in the Fed minutes, with the March Bund future down 17 ticks on the day at 115.26.

The yen continued to feel the heat of carry trades, with investors sticking to a trend for using the low-yielding currency to fund purchases of higher-return assets.

The Bank of Japan reiterated its policy of raising interest rates at a gradual pace -- having increased borrowing costs to a decade-high 0.5 percent on Wednesday, which helped usher the euro to a fresh record peak versus the yen overnight.

Stocks rally, oil near $60

Yen softness against the euro boosted exporter stocks in Japan, leading the Nikkei average to top 18,000 for the first time in nearly seven years.

European shares followed the upbeat pace, boosted by mostly forecast-beating results from European heavyweights like Nestle , AXA and BASF.

BASF shares jumped 5.8 percent to a record high after the German chemical group brushed off fears of a sector slowdown by forecasting higher sales and increasing its dividend for 2006.

The pan-European FTSEurofirst 300 index was up 0.56 percent at 1,543.31 points.

“We are now catching up from yesterday’s losses and corporate news is also driving the markets,” said Boris Boehm, head of equity fund management at Nordinvest.

Oil prices fell slightly, with US crude down 17 cents at $59.90 a barrel, but prices were seen staying within range of $60 after the closure of a pipeline in the United States.

Gold was down around $3 from the New York close on Wednesday, hovering at $675.80 per troy ounce after hitting a 9-month high of $682.10.