Dollar trims losses on Japan outlook cut

LONDON: The dollar pared losses and world stocks and crude prices gave up some of their gains on Friday after a ratings blow for Japan rattled markets already unsettled by the euro zone's worsening debt crisis.

Investors sought security in 10-year German Bunds, sending yields back below 3 percent after Fitch cut Japan's outlook to negative. The rating agency said the massive cost of a March earthquake and tsunami would pile more strain on the country's already shaky public finances.

News that shares in Franco-Belgian financial services group Dexia had been suspended in the European mid-morning also put upward pressure on German bond prices. The bailed out group said it will speed up its divestment of assets and take a $5.1 billion hit in the second quarter.

Benchmark Bund yields probed below what is a key psychological level on Thursday for the first time since mid-January due to concerns over a possible Greek debt restructuring and its impact on other heavily-indebted countries on the euro zone periphery.

The weaker dollar, along with persistent Middle East tensions, helped Brent crude to trade above $115 a barrel, though it was still headed for its first monthly loss since last August.

Europe's FTSEurofirst 300 index of leading stocks put on 0.6 percent, helped by gains in bank shares after the Financial Times said stringent capital requirements for European banks could be relaxed.

"There is a big chance that they don't have to go out to shareholders to ask for more money and that is the main advantage because a capital increase will weigh on their stock prices," said Koen de Leus, strategist at KBC Securities.

"It's good for banks, but it's not good for regulation. In the long term it's not a good thing for financial stability."

US stock index futures were flat, indicating a steady open on Wall Street.

World equities measured by the MSCI All-Country World Index rose 0.6 percent, though they trimmed some of the gains after the Fitch announcement and were still set for their biggest monthly percentage losses in a year.

Nomura said in a note that global fund investors increased their selling of equities to a net of $9.4 billion for the week of May 19-25, the heaviest in 10 months and up from a net outflow of $5 billion the week before.

DOLLAR PARES LOSSES

The dollar fell 0.5 percent against a basket of currencies and was down 0.3 percent against the Japanese currency at 81.09 yen.

The euro was up 0.7 percent at $1.4239 though it was down 0.3 percent at 1.2197 Swiss francs after hitting a record low of 1.2167 francs.

"Both (euro and dollar) have fairly big negatives ... they're struggling to outweigh each other on a durable basis," Jeremy Stretch, currency strategist at CIBC, said.

Yields on benchmark 10-year Treasuries were up 2 basis points at 3.0772 percent after falling more than 7 basis points overnight on the back of unexpectedly weak consumer spending numbers in US first quarter growth data.

Brent crude prices held steady and were down 8.5 percent for the month. Copper prices put on 1.6 percent, but they were on track for their third straight monthly losses.

Copyright Reuters, 2011