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Dollar eases, shares firm, Gustav lifts oil

LONDON - Shares held firm on Friday as markets digested a sharp upward revision to U.S. economic growth and a fall in euro zone inflation, while the dollar eased as investors booked profits after its steep climb this month.

The dollar index dipped about 0.2 percent and oil rose more than $1 to around $117 a barrel as Tropical Storm Gustav headed for the Gulf of Mexico, home to a quarter of U.S. crude production.

Thursday's hefty upward revision of U.S. GDP growth -- to an annualised 3.3 percent in the second quarter -- underscored the extent to which the U.S. economy has outperformed rapidly slowing Europe and Japan since March.

That theme helped propel the dollar in August towards its largest monthly rise against the euro since January 1997, up about 5.5 percent on the month.

"It would not be a surprise if the euro were to fall further," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo, adding the common currency could eventually drop below $1.40.

Euro zone inflation slowed more than expected in August, official statistics showed on Friday, to 3.8 percent year-on-year from an all-time peak of 4.0 percent in July.

The euro slipped to $1.4728 from $1.4748 just before the data.

After a raft of European Central Bank officials spoke up this week, markets are not expecting rate cuts soon.

ECB Governing Council member Klaus Liebscher echoed comments from colleagues earlier in the week that inflation was too far above the target of close to but below 2 percent.

The FTSEurofirst 300 index of top European shares edged up 0.2 percent to 1,193.07, with banking stocks firm and French retailer Carrefour up nearly 7 percent after a reassuring first half update.

Asian stocks climbed more markedly as the punchy U.S. growth data boosted the outlook for industrial firms and exporters, but shares posted their fourth monthly decline in a row.

Japan's Nikkei share average rose 2 percent, lifted by shares of well-known overseas companies like Honda Motor Co and Canon Inc.

Big month for dollar, Gustav strengthens

The dollar shed two thirds of a percent against the yen at 108.76 while the euro was up 0.2 percent but more than 13 cents off its peak of $1.6038, set in mid-July.

"We've had a strong run for the dollar ... (and) some traders, especially in the States, might not be willing to run with it over the (upcoming holiday) weekend," said Steve Barrow, G10 currency strategist at Standard Bank in London.

Although the 15-nation currency has bounced from a six-month low of $1.4570 hit on Tuesday, it suffered a steep decline in August after a raft of weak economic data doused expectations for a European Central Bank interest rate rise this year.

Sterling hit a 12-year low on a trade-weighted basis as the spectre of a UK recession bolstered speculation of a possible interest rate cut this year.

The pound was on track for its biggest monthly loss since October 1992 -- shortly after Britain was forced to leave the European exchange rate mechanism.

ECB policymakers, notably Axel Weber, have said this week that talk about lower euro zone rates is premature.

In the starkest of contrasts, UK rate setter David Blanchflower, who has consistently voted for easier policy, told Reuters on Thursday that big cuts in interest rates were needed now to stop the economy heading into a deep and prolonged slump.

Euro zone government bonds rose modestly after a sell-off spurred by diminished expectations of ECB rate cuts.

September Bund futures hit a session high of 114.48 and were last 30 ticks higher on the day at 114.47 after the weaker-than-forecast euro zone inflation data.

Crude for October delivery rose $1.51 to $117.10 barrel by 1035 GMT, just off earlier highs of $117.17.

Tropical Storm Gustav was blamed for at least 68 deaths in the Caribbean and U.S. forecasters said it could hit New Orleans and Gulf of Mexico oil fields, prompting energy companies to halt production and evacuate personnel from offshore rigs.