Dollar firm as Syria action on hold, oil eases

Reuters
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A visitor walks past logos at the Tokyo Stock Exchange in Tokyo June 13, 2013. REUTERS/Toru Hanai

By Richard Hubbard

LONDON (Reuters) - Signs of strength in the U.S. economy kept the dollar near a four-week high against major currencies on Friday, while oil prices fell on ebbing prospects of an imminent U.S.-led military strike against Syria.

Global equities and most emerging currencies steadied, but both will end the week and the month sharply lower as investors pulled out of riskier assets in expectation of a scaling back of U.S. monetary stimulus as well as western intervention in Syria.

A holiday weekend in America and month-end positioning by traders was keeping activity thin but the persistent worries about the Middle East and the impact of rising U.S. bond yields from the Fed's policy shift meant the respite for higher-risk investments may only be temporary.

"I think the dollar recovery trend remains in place though we may see a pause over the next few days," said Ian Stannard, head of European foreign exchange strategy at Morgan Stanley.

"The underlying fundamental picture is still there and that comes down to a rise global yields and a rise in the U.S. dollar that is still going to weigh on the more vulnerable currencies."

Fears of broader conflict in the Middle East eased after Britain said it would not join any military action against Syria.

That looked set to delay any U.S.-led strike at least until United Nations investigators report back after leaving Syria on Saturday. China has said there should be no rush to force U.N. Security Council action against Syria until the U.N. investigation is complete.

The easing of tensions over Syria sent Brent crude oil below $115 a barrel, off highs of $117 set earlier this week when military action seemed imminent. U.S. crude was down 90 cents to $107.90.

"The situation is still volatile," said Alex Yap, an analyst at energy consultancy FGE in Singapore. "If the U.S. decides to attack, prices could be pushed higher."

GRIM MONTH

MSCI's world equity index , which tracks shares in 45 countries, was virtually flat on Friday but is on course for its worst week of the month and its worst month since June.

European shares were weaker as stocks in big energy companies felt pressure from the retreat in oil prices. The FTSEurofirst 300 index (.FTEU3) was off 0.5 percent, taking its weekly losses to nearly 2 percent. (.EU)

Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan finished up about 0.7 percent, managing a 0.1 percent weekly gain but a 1.3 percent monthly loss. Japan's Nikkei (NIK:^9452) lost 0.5 percent despite new data that painted a brighter economic picture.

Currency markets focused on the economy and interest rate differentials after U.S. data on Thursday showed a quicker-than-expected annual growth of 2.5 percent in the second quarter.

Combined with strength in the U.S. labor market, the data has bolstered the case for the Fed to begin winding down stimulus as early as September.

Investors were looking ahead to U.S. personal consumption expenditure (PCE) for July, the August Chicago Purchasing Managers' Index (PMI) survey and University of Michigan consumer confidence survey, all due out later on Friday, for further signs of strength.

The dollar index (.DXY), which measures its value against six major currencies, was at 81.974, not far from a four-week high of 82.067 struck on Thursday.

Among emerging currencies, the Indian rupee was trading at 67.36 per dollar, down from Thursday's close of 66.55. It has tumbled 10.4 percent against the dollar so far this month on course to record its largest monthly fall ever, according to Thomson Reuters data.

The Indonesian rupiah has lost nearly 6 percent so far in August, which would be its biggest monthly fall since November 2008. On Thursday, Indonesia's central bank raised its main interest rates, the latest country forced to defend its currency as investors pulled out funds from emerging markets in search of safer destinations.

In commodity markets, gold eased 0.1 percent to around $1,406.29 an ounce, moving away from a 3-1/2 month high hit on Wednesday when the fears over Syria prompted a flight to safety.

Copper prices added 0.5 percent at $7,185 a tonne (1.1023 ton), after sliding for a third day on Thursday and reaching their lowest in almost three weeks due to the stronger dollar, concerns about Syria and slightly higher inventories.

(Additional reporting by Ayai Tomisawa in Tokyo and Jongwoo Cheon in Singapore; Editing by John Stonestreet)

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