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Risk appetite flickers in Europe

Tuesday, September 02 09:50:33

Risk appetite flickered back into life in financial markets on Tuesday with the dollar and European and Japanese shares rising while safe-haven bonds, the yen and gold all took a step back.

The dollar rose in thin trading to its highest since January against the yen. The euro reached a one-year low against the greenback as speculation mounted about what the ECB will do when it meets on Thursday.

With U.S. markets closed for Labor Day, investors in Asia had been somewhat subdued, but the mood in Europe seemed brighter as markets reopened. Britain's FTSE, Germany's DAX and France's CAC 40 opened 0.3, 0.6 and 0.4 percent respectively to lift the pan-regional FTSEurofirst 300 back towards a 6 1/2-year high. Even shares in Moscow edged higher after three straight days of falls.

Bond markets have been one of the big beneficiaries of expectations the ECB will loosen policy to revive the euro zone's flagging economy, and traders cashed in some of those before Thursday's meeting.

Dovish comments by ECB President Mario Draghi late last month led to bets the central bank is preparing to pump more liquidity into the system, possibly via purchases of government or corporate bonds, a measure known as quantitative easing (QE).

Sources from at ECB told Reuters last week new action at its meeting this Thursday was unlikely but not impossible, and the barrier to QE was still "very high".

As European trading settled after the early flurry, the euro was steady at $1.3123 after dropping as low as $1.3115 in Asia. It had held to a range of $1.3119 to 1.3146 on Monday. The dollar was boosted by the flagging euro and by gains in Tokyo shares that reduced demand for the safe-haven yen. The U.S. currency rose to a seven-month high of 104.87 yen and reached a 14-month high on the heavily traded index of currencies.

With U.S. markets preparing to reopen after the long weekend, focus was on the ISM's report on U.S. manufacturing due later in the day, which might suggest the U.S. is ready to phase out quantitative easing just as the ECB considers adopting it. (Reuters)

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