* Dollar hits five-month high vs basket of currencies
* Commodities weighed by stronger greenback
* MSCI world equity index down 0.8 percent at 338.58
(Updates prices, adds comments, changes byline)
By Ian Chua
LONDON, Aug 8 (Reuters) - The dollar raced to a five-month
high against the euro on Friday as worries about the euro zone
economy mounted, while oil prices slid below $118 a barrel on
diminishing supply concerns.
European stocks were flat with automotive firms benefiting
from the stronger dollar but energy companies like BP <BP.L>
pressured by the fall in oil prices.
A worse-than-expected second quarter loss from Fannie Mae
<FNM.N>, the largest U.S. home funding source, weighed on U.S.
stock futures <SPc1><DJc1><NDc1>, which pared early gains.
The stronger dollar was also a negative for commodities,
knocking more than 2 percent off copper <MCU3=LX> to take it to
a six-month low.
Oil dipped below $118 a barrel after an indication that a
key oil pipeline through Turkey, still burning after an
explosion, may reopen earlier than previously expected, while
gold <XAU=>, often seen as an inflation hedge, briefly fell
below $860 an ounce to an eight-week low.
"The dollar is driving metals lower," said John Meyer, an
analyst at Fairfax Investment Bank.
Data showing Italy's economy shrank in the second quarter
cast a shadow over the euro zone, and came a day after European
Central Bank President Jean-Claude Trichet highlighted risks to
growth, even though he reiterated his concerns about inflation.
Trichet's comments were interpreted by markets as dovish,
sparking a steep fall in bond yields as markets priced out the
risk of another interest rate hike this year.
"There's going to be more speculation of ECB rate cuts later
this year," said Gerhard Schwarz, head of global equity strategy
at UniCredit in Munich.
The pan-European FTSEurofirst 300 index <> edged down
0.1 percent, with Germany's DAX <> and London's FTSE
<> both falling about 0.5 percent.
MSCI main world equity index <.MIWD00000PUS> was down 0.8
percent.
Royal Bank of Scotland <RBS.L> posted a first half loss was
691 million pounds ($1.3 billion), which although not as bad as
feared, kept the sector's woes firmly in the spotlight.
DOLLAR SHINES
The dollar surged more than 1 percent against a basket of
major currencies <.DXY>, reaching highs last seen in late
February and on track for its biggest weekly rise in 3-1/2
years, while the euro <EUR=> slid below $1.51 -- its lowest in
more than five months.
"Our assessment continues to be that the markets have
over-interpreted ECB dovishness and there is a serious risk of a
EUR/USD bounce should any of the governing council members
stress this in the coming days," said RBS global head of forex
strategy, Adam Cole.
According to interest rate futures, investors are no longer
expecting a euro zone interest rate hike this year.
The two-year Schatz yield <EU2YT=RR> fell to a session low
of 4.025 percent, well below the ECB's benchmark 4.25 percent
rate, while the 10-year Bund yield <EU10YT=RR> touched a low of
4.236 percent.
"After having been bullish on European bonds for the past
couple of weeks, we're turning neutral at these levels. In
particular, I can't see the two-year yield going lower," said
Cyril Beuzit, head of interest rate strategy at BNP Paribas.
(Editing by Mike Peacock)
