Stocks, Dollar Rise as War Worries Ease

reuters.com Thu January 30, 2003 06:26 AM ET By Nigel Stephenson

LONDON (Reuters) - Shares and the dollar rose and safe-haven gold dipped on Thursday as investors seized on a slight easing in global tension after Washington said it was launching a final diplomatic push to avert war with Iraq.

Oil and risk-free government bond prices also fell as President Bush prepared to make a diplomatic push to persuade Iraq to disarm and thus avoid a possible conflict that has been unsettling financial markets for months.

Soothing signals about the state of the U.S. economy from the Federal Reserve, which left interest rates at a four-decade low on Wednesday, also added to the less gloomy mood.

"I think probably the steady outlook they provided was the most reassuring for the market," said Rob Hayward, senior currency strategist at ABN AMRO.

Fed policymakers left rates at 1.25 percent and said risks to the U.S. economy remained evenly balanced between higher prices and renewed downturn and expressed hope U.S. growth would pick up once fears of war with Iraq have lifted.

"An easing bias could have been justified by data or by uncertainties, but people would have been more concerned seeing that even the Fed's worried, and wonder if they are going to cut rates again or if the economy was in a worse position than thought."

The dollar firmed after a rally on Wall Street following the U.S. Federal Reserve's widely expected decision.

The euro was last trading around $1.0755, up more than half a percent from its New York close. The greenback hit a three-year low beyond $1.09 on Monday. The U.S. currency was up a third of a percent on the yen at 118.89.

"The dollar is following stocks now," said Julian Jessop, chief European economist at Standard Chartered in London.

"And as long as stocks open higher, the dollar will continue to have a good day. There is a feeling that a lot of bad news has already been priced in, and with most people being big sellers this is a good moment to take profits," he said.

The market was looking to U.S. fourth-quarter growth data due at 8:30 a.m. EST for more clues to the state of the economy. Economists forecast a subdued 0.7 percent annual growth rate after 4.0 percent in the previous three months.

STOCKS RISE AFTER FED STEADIES NERVES

European stocks rose after the Fed helped steady nerves rattled by the threat of war.

The FTSE Eurotop 300 index of pan-European blue chips was up 2.0 percent at 1100 GMT while the narrower DJ Euro STOXX 50 index was up 2.35 percent.

However, some money managers cautioned the downward trend, which saw nine consecutive days of losses, was still intact.

"Last week we had huge declines in equity markets and therefore some upward correction is inevitable, but we asset managers take a more medium-term view and we continue to underweight equities," said Joerg Kraemer, a strategist at Invesco Asset Management in Frankfurt.

U.S. stock index futures, which were lower in early European trade, turned higher, indicating Wall Street would open higher.

The Dow Jones Industrial average ended up 0.27 percent on Wednesday. The tech-dominated Nasdaq closed 1.18 percent higher after Merrill Lynch raised its outlook on Novellus Systems Inc, a maker of equipment used to produce computer chips.

Tokyo shares closed lower as institutions, spooked by the threat of war, sold blue chips. The Nikkei ended down 0.17 percent, just above a two-decade low hit last November. The broader TOPIX index dipped 0.07 percent.

Oil prices steadied as traders eyed Bush's diplomatic effort. Brent crude for March delivery was almost unchanged at $31 a barrel. U.S. light crude, which rose three percent on Wednesday on a big drop in U.S. winter heating oil stocks, was also flat at $33.63 a barrel.

The threat of war in the Gulf, which supplies 40 percent of world crude exports, and a strike in Venezuela, have pushed up prices 35 percent since late November.

Gold, seen as a safe place for investors to put their money in times of geopolitical turmoil, fell in Europe. Spot gold, which has risen some seven percent this year, was quoted at $363 an ounce, compared with $366 at Wednesday's New York close.

Safe-haven government bond prices fell. The yield on the two-year German Schatz, which moves in the opposite direction to the price, was up 2.7 basis points at 2.63 percent. It touched a 3-1/2 year low of 2.54 percent last week. The 10-year Bund was yielding 4.09 percent, up 2.7 basis points.