Cautious Fed sends stocks to record highs, dollar dips

By Jemima Kelly

LONDON (Reuters) - Global stocks scaled record highs on Friday, capping their best week in over two months as the dollar stayed close to nine-month lows, with bets on a gradual U.S. Federal Reserve rate hike path and hopes for a strong earnings season boosting risk appetite.

After a scare at the end of last month, when stock markets skidded on the view that the era of easy money might be coming to an end across the globe, investors have been soothed by a run of more dovish comments from central bankers.

Dallas Fed President Robert Kaplan on Thursday advocated a go-slow approach to further tightening after two hikes so far this year, saying he first wants to see more evidence that inflation is heading back up to the Fed's 2-percent goal.

Fed Chair Janet Yellen also said on Thursday that the central bank's further rate hikes could be gradual, given persistently low inflation despite an improving economy.

European shares were poised for their best week since late April as investors piled back into equities, though moves on indexes on Friday were muted as investors hunkered down ahead of earnings reports from major U.S. banks including JPMorgan (N:JPM) and Citigroup (N:C) later in the day.

The pan-European STOXX 600 (STOXX) index inched up 0.1 percent, adding to earlier gains on stock markets in Asia that took MSCI's world stock index <.WORLD> to an all-time high.

"(The Fed comments) add to our conviction that no further Fed hike should be expected for the rest of the year, which should prove reassuring for markets concerned about excessive tightening risk globally," Mizuho's head of euro rates strategy Peter Chatwell said in London.

CARRY TRADES IN FAVOR

The signals from the Fed drove the dollar to a nine-month low against its broad index (DXY) on Thursday and it stayed close to that trough, inching down 0.1 percent on the day.

The yen, meanwhile, was on the back foot against high-yielding currencies such as the Australian dollar (JPYAUD=) as the VIX index (VIX), a gauge of asset volatility, drifted lower and provided a boost to carry trades. [FRX/]

"The latest comments from Yellen and others suggest that interest rates will rise very gently, and that is supportive for high-yielding currencies for now," said Viraj Patel, an FX strategist at ING Bank in London.

The recent caution from central bankers has also taken the sting out of a sell-off in the bond market, which had been gathering steam over the past few weeks in the euro zone on rising expectations that the European Central Bank is set to wind down its asset purchase program. [GVD/EUR]

The bloc's benchmark German 10-year yield fell some 3 basis points when European trading started on Friday to 0.50 percent, moving away from an 18-month high hit earlier this week of 0.583 percent.

Earlier, Japan's Nikkei (N225) added 0.2 percent, poised for a weekly rise of just over 1 percent. MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) advanced 0.3 percent to its highest level in two years.

Wall Street had also edged higher on Thursday (DJI) (SPX) (IXIC) though it was set for a slightly weaker open ahead of key earnings reports.

"The U.S. profit reporting season looks likely to be a key market driver over the next couple of weeks," Ric Spooner, chief market analyst at CMC Markets in Sydney, wrote in a note.

"Full valuations suggest that the market is yet again going into this reporting season anticipating results to outperform consensus analyst expectations."

The euro was up 0.1 percent at $1.1410 and was set to end the week flat.

The ECB is likely to signal in September that its bond-buying scheme will be wound down gradually next year, but President Mario Draghi could give the next clue on the plans in late August, the Wall Street Journal said on Thursday.

The Canadian dollar remained near its strongest in over a year after the Bank of Canada this week raised interest rates for the first time since 2010, with further tightening expected this year.

In commodities, oil markets edged lower amid high fuel inventories and improving industry efficiency, but remained on track for a solid weekly gain. [O/R]

Brent crude futures (LCOc1), the international benchmark for oil prices, were down 19 cents, or 0.4 percent, at $48.23 per barrel.

Gold was steady at $1,217.32 an ounce, heading for a half-percent gain for the week.

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