Stocks Slide, Debt Yields Up, Dollar Firm

Wed Aug 11, 2004 05:54 AM ET
By Pratima Desai

LONDON (Reuters) - European stocks slid, debt yields rose and the dollar held firm on Wednesday after the U.S. Federal Reserve hiked interest rates and repeated its upbeat view on the U.S. economy, despite soaring oil prices.

U.S. oil prices hovered near record highs as lower output and exports from Iraq and a storm in the Gulf of Mexico added to worries about supply disruptions.

U.S. light crude hit $45.04 a barrel on Tuesday, the highest level since oil futures were launched on the New York Mercantile Exchange in 1983. It was last trading up 17 cents at $44.69 a barrel, while London Brent rose 22 cents to $41.39 a barrel.

The U.S. central bank raised the benchmark funds rate to 1.50 percent on Tuesday from 1.25 percent to head off potential price pressures, partly from higher energy costs. The Fed acknowledged the rising price of crude oil was largely to blame for recent weak jobs growth.

It was the second rise in six weeks, but investors were focused on whether upcoming data would support the Fed's view that the U.S. economy was poised for stronger growth going forward.

The dollar rallied on Tuesday after the Fed's rate hike.

"There was an initial bounce in the dollar because some people had been betting on a no-change rate decision," said Gavin Redknap, economist at Standard Chartered.

"The Fed did not change its promise to raise rates at a measured pace, but I do not think this necessarily signals they will move again in September."

The dollar stood at $1.2220 to the euro, up around a cent from Tuesday's lows, while against the yen it was firm at around 111.25.

STOCKS, BONDS

In New York, the Dow Jones Industrial Average ended up 1.3 percent on Tuesday as markets took comfort from the Fed's upbeat view of the U.S. economy.

In Tokyo, the Nikkei average ended up nearly 0.9 percent as fears about Japan's export-led recovery receded.

The broader TOPIX index added nearly 1.5 percent.

But in Europe, a fall in technology shares led the market down after U.S.-based Cisco Systems issued a disappointing outlook after close of trade on Wall Street.

Cisco, the world's largest web equipment maker, reported a rise in inventories and warned that customers were becoming cautious as it forecast flat sales for the current quarter.

The pan-European blue-chip FTSE Eurotop 300 index was last trading down 0.7 percent and the narrower DJ Euro Stoxx 50 index had slipped 0.8 percent.

Bond markets, focusing on the Fed's stronger growth assessment, pushed up yields.

The interest rate sensitive two-year Schatz yield was up 3.2 basis point at 2.496 percent and the benchmark 10-year Bund yield was 3.3 basis points higher at 4.104 percent.

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