(Updates throughout, changes dateline)
* Markets juggle expectations for U.S., European rates
* European shares down on bank nerves before Morgan Stanley
* Oil edges back up, offers no relief for inflation fears
By Amanda Cooper
LONDON, June 18 (Reuters) - The dollar edged up on
Wednesday, paring recent losses after weak U.S. data cast doubt
over expectations for a series of rate rises this year, while
nagging worries about the banking sector weighed on European
stocks ahead of results from Morgan Stanley <MS.N>.
The oil price <CLc1> stoked concern among investors over the
threat of inflation by renewing its rise after losing 1.7
percent in the last four sessions.
Government bond yields steadied after recent declines as
comments from officials at the Federal Reserve, the European
Central Bank and the Bank of England have all tempered
expectations for a series of rate rises this year from all three
central banks.
Policymakers around the world have warned price pressures
from record-high fuel and food costs could warrant tighter
monetary policy, even at the expense of growth in the short
term.
Investors are at pains at the moment to decipher the
intentions of both the Federal Reserve and the European Central
Bank, both of which suggested only two weeks ago they may raise
their respective benchmark interest rates to combat inflation,
only to hint shortly after no aggressive rises were on the
cards.
"What we're really having to contend with at the moment is
how central bank rhetoric and economic data is challenging
market expectations for monetary tightening by the end of the
year in the United States and the euro area," said Kamal Sharma,
G10 strategist at JPMorgan in London.
"Over the near term, we think euro/dollar is likely to be a
tug of war between competing central bank rhetoric."
ECB Council member Yves Mersch said late on Tuesday there is
a 'possible certainty' of an ECB interest rate hike at the July
3 meeting, but played down the chances of a series of hikes.
Fellow Executive Board member Juergen Starck said inflation
was unacceptably high, pushing the euro briefly to 11-month
highs against the yen <EURJPY=> at 167.99 yen, according to
Reuters data.
The euro eased against the dollar, dipping 0.2 percent to
$1.5478 by 1135 GMT, but is still up 0.4 percent this week and
analysts believe it has plenty of scope for further gains, given
the ECB's suggestion of a rate rise next month.
"If the markets take out rate hikes in the U.S. at the same
time as the ECB persists in its desire to raise rates in July, I
wouldn't rule out a new high in euro/dollar," said Teis
Knuthsen, head of FX research at Danske Bank in Copenhagen.
BONDS STEADY, STOCKS OFF
Against this backdrop, two-year euro zone bond yields
<EU2YT=-RR> -- often the most sensitive to switches in investor
thinking on the likely path of interest rates -- were a touch
higher at 4.650 percent, and within striking distance of their
highest since late 2000.
Weak U.S. housing and industrial production data, along with
figures that showed housing starts fell to their lowest since
1991, reined in the dollar. Wall Street stocks took an
additional hit from a brokerage that warned U.S. banks may have
to raise as much as $65 billion in capital to shore up balance
sheets eroded by the mortgage crisis.
European stocks, as reflected by the FTSEurofirst 300 index
<> of leading European shares, fell by more than 1 percent
in morning trade, led by declines in financials as investor
concern about Morgan Stanley results later on weighed on the
likes of Royal Bank of Scotland <RBS.L>, UBS <UBSN.VX> and Banco
Santander <SAN.MC>.
The FTSEurofirst 300 was down 1.1 percent at 1,253.81, while
global equities <.MIWD00000PUS> were down 0.3 percent.
Oil prices edged up on Wednesday, taking U.S. crude futures
for July <CLc1> up 0.3 percent to $134.30 a barrel. Crude oil
hit a record of nearly $140 on Monday.
OPEC top producer Saudi Arabia has promised to ramp up
production to its fastest rate in decades, UN chief Ban Ki-moon
was quoted as saying last weekend. []
But pointing to more inflationary pressures ahead, U.S. corn
and soybean prices closed near record highs on Tuesday as
flooding in the U.S. Midwest damaged crop prospects.
Still, in the face of a slowing economy, the Federal Reserve
is now seen almost certain to keep its benchmark rate at 2.0
percent at a two-day meeting next week.
"What the Fed actually does with rates from now on depends
more on unforecastable oil prices than the near-term direction
of the macroeconomy," Rob Carnell, a London-based economist at
ING said in a note.
"But whilst we would not rule out a hike, we still believe
that rates may yet trough lower before the end of this interest
rate cycle."
In Asia, stocks extended a fragile two-day rise, helped in
part by the softening in the oil price, while Japanese
government bond prices <2JGBv1> rallied, boosted by receding
expectations for aggressive interest rate rises.
In commodities, gold <XAU=> inched up $885.15/886.15 an
ounce from $884.20/885.40 late in New York on Tuesday.
(Additional reporting by Veronica Brown and Toni Vorobyova in
London and Anshuman Daga in Singapore; Editing by Ruth
Pitchford)
