LONDON: The euro hit a 1-year high on Wednesday and German 10-year Bund yields continued to rise after doubling the previous day, as bets grew that the European Central Bank is readying to scale back its 2-trillion-euro stimulus programme.
It was a lively European session. The bond market sell-off and jump in the euro came as a dive in technology stocks after the latest global cyber attack sent European shares to a two-month low.
The euro was eyeing up $1.14 and was at a 7-month high versus the pound though it hit the brakes after ECB sources said President Mario Draghi's comments on tweaking the bank's aggressive stimulus policy had been overinterpreted.
The common currency is now up almost 10 percent this year. The head of the Federal Reserve, Janet Yellen, and one of her lieutenants, Patrick Harker, said on Tuesday that they expected to continue raising US interest rates, but it couldn't rally the dollar.
That provoked the banking world's single biggest cheerleader for a stronger dollar, Deutsche Bank, to declare the end of the greenback's bull run which dates back to 2014.
"I do think the euro now has got quite significant momentum behind it and I think that will build towards the confirmation of some tapering announcement this year. So I would be long the euro on a tactical basis for the rest of the year," JPMorgan Asset Management's Global Market Strategist, David Stubb, said.
At the same time, core European bonds are the significant area of vulnerability to better euro zone growth and to changes in ECB policy, he added.
"If you are looking at a 10-year maturity and further out, it is a global bond market and the extremely low yields in core Europe stick out alongside Japan and Switzerland as the places that seem stretched in terms of valuation."
Amid all the choppiness, safe-haven gold rose for a sixth day in the last seven. Wall Street, meanwhile, looked set to struggle again after the S&P 500 and Dow Jones took their biggest tumbles in over a month.
Nerves over the latest cyberattack, this time called Goldeneye, weighed on big tech names including Apple, Google-parent Alphabet, Facebook and Microsoft in premarket trading.
In Asia overnight, MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.4 percent as it pulled back from a two-year high hit on Monday.
Japan's Nikkei ended down 0.5 percent, as the yen, at 111.900, also took advantage of the dollar's weakness. The banking and insurance sectors however outperformed on expectations of higher rates.
BONDS SHAKEN, METALS STIR
The yield on US Benchmark 10-year Treasury notes last stood at 2.22 percent, well up from Monday's 2.14 percent levels.
Federal Reserve chief Janet Yellen had said in London that it was appropriate to "gradually" raise US rates, although there was an acknowledgement that inflation had seen some slippage.
"Yellen's comment is supporting Japanese financial stocks today, and for the long-term, Japanese stocks are on the rising trend supported by US-led global economic recovery," said Mutsumi Kagawa, chief global strategist at Rakuten Securities.
Wall Street's drop on Tuesday saw it close at its lowest since May 31. It was spooked after the US Senate delayed voting on a healthcare reform bill, rekindling worries about the timeline of Donald Trump's business-friendly policies.
The dollar index, which gauges the US currency against a basket of six major counterparts, edged down 0.2 percent to 96.227, well below its previous session high of 97.447.
Euro bulls pushed it up 0.5 percent to a one-year high of $1.1373 with FX traders waiting for another flurry of ECB policymaker speeches at a conference hosted by the central bank in Portugal.
The greenback also slumped against the Canadian dollar after Bank of Canada Governor Stephen Poloz told CNBC that it looked like the central bank's rate cuts have done their job.
Sterling, which has come under pressure again from Britain's recently volatile politics, bounced too, clawing above $1.28 to its highest since Prime Minister Theresa May lost her parliamentary majority on June 8.
Crude oil futures gave back some of Tuesday's near 2-percent gain made on the back of the weaker dollar and expectations that US crude inventories might decline for a third consecutive week.
Brent crude futures were down 0.2 percent at $46.55 per barrel. US crude futures were down 0.5 percent at $44.04.
The weaker dollar helped bolster spot gold, which was up 0.4 percent at 1,251.59 per ounce, while industrial metals copper, lead and zinc prices dipped back from three-month highs.
"The market got ahead of itself in the first quarter with (hopes for) Trump's infrastructure plans, that's not happening now but against that China growth is ok," said SP Angel analyst John Meyer.
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