Dollar up on Fed speculation; global stocks, oil up too

By Barani Krishnan

NEW YORK (Reuters) – The U.S. dollar rose on Tuesday on speculation the Federal Reserve might curtail a program aimed at keeping interest rates low, while turmoil in Libya lifted energy stocks and oil prices.

The yen fell the most against the dollar since intervention by the Bank of Japan and other major central banks to stop runaway gains in the Japanese currency.

U.S. Treasuries widened losses after the sale of $35 billion in five-year notes. It was the second of the Treasury’s three auctions of coupons this week, totaling $99 billion.

The dollar rose after the president of the St. Louis Federal Reserve Bank, James Bullard, told an audience in Prague that the U.S. economy was strong enough for the Fed to curtail its $600 billion asset purchase program by about $100 billion.

The euro hit a session low of $1.4060 versus the dollar on the EBS trading platform after falling through reported bids at $1.4080. It last traded above $1.410.

U.S. crude oil closed up 81 cents, or 0.8 percent, at $104.79 a barrel, overcoming early weakness, on doubts about Libya’s ability to resume oil exports soon after Muammar Gaddafi’s troops halted a rebel advance.

Copper tracked gains in equities, while a rebound in agricultural markets boosted gains in commodities ahead of the first-quarter close.

GLOBAL, US STOCKS UP

World stocks as measured by MSCI (.MIWD00000PUS: Quote, Profile, Research) were up 0.3 percent, reversing an earlier decline of 0.3 percent brought on by weakness in European shares, particularly banking stocks.

Global stocks rebounded on the strength in U.S. shares, which were powered first by a rise in large-cap technology firms and later energy-related shares.

But trading remained light, a day after Wall Street registered the lowest volume for 2011. About 6.2 billion shares traded in composite volume on the New York Stock Exchange, NYSE Amex and Nasdaq, the second-weakest of 2011 and far below last year’s estimated daily average of 8.47 billion.

“The quarter is ending with a lot of uncertainties out there,” said Michael Shaoul, chairman of the New York-based Marketfield Asset Management, which oversees $973 million.

“There’s nothing obvious about what investors need to do in this environment, and that’s why you’re seeing such low volume,” he said. “No one has any reason to recommit capital.”

The Dow Jones industrial average (.DJI: Quote, Profile, Research) ended up 81.13 points, or 0.67 percent, at 12,279.01. The Standard & Poor’s 500 Index (.SPX: Quote, Profile, Research) added 9.25 points, or 0.71 percent, at 1,319.44. The Nasdaq Composite Index (.IXIC: Quote, Profile, Research) gained 26.21 points, or 0.96 percent, at 2,756.89.

Oil services stocks rose for a fifth session as investors continued to add to a sector at its highest since August 2008. The PHLX oil services sector index (.OSX: Quote, Profile, Research) rose 1.9 percent.

“Until the oil market cracks, momentum traders are buying the oil services stocks because that’s what’s working,” said Shawn Hackett, president of Hackett Advisors in Boynton Beach, Florida. “Until crude breaks the $100 level back down, you’re going to continue to see a strong bid on oil service stocks.”

European banking shares closed up after falling earlier on a surprise capital increase by Italian bank UBI Banca (UBI.MI: Quote, Profile, Research). The FTSEurofirst 300 (.FTEU3: Quote, Profile, Research) index of top European shares ended up 0.04 percent at 1,125.94.

YEN, BOND YIELDS

The dollar and euro both reached their highest levels against the yen since March 18, when the Bank of Japan and others intervened to stop yen gains.

The dollar rose to 82.51 against the yen. The euro hit a 10-1/2 month high against the Japanese currency at 116.24.

“While there are no obvious catalysts for the yen’s moves, we suspect that the combination of recent equity market resilience and higher U.S. Treasury yields is weighing on the Japanese currency,” said Vassili Serebriakov, currency strategist at Wells Fargo Bank in New York.

The two-year U.S. Treasury yield rose to 0.81 percent, eight basis points above Friday’s close and up 18 basis points in six days, widening its gap over comparable Japanese yields.

U.S. 30-year Treasury bonds briefly fell a point in price after a tepid five-year note auction, rising stocks and hawkish Federal Reserve statements hurt yields across the Treasury curve.

Treasury long bonds were last down 29/32 in price to yield 4.54 percent, up from 4.50 percent late on Monday. The yield has risen from 4.38 percent on March 16.

Portugal’s 10- and 2-year yields jumped to euro lifetime highs and Greece’s 2-year yields rose 10 basis points to 15.46 percent after a downgrade by Standard & Poors.

The S&P downgrades left Portugal one notch above junk and Greece’s credit-worthiness below that of Egypt, deepening the debt woes of two of the weakest countries in the euro zone.

(Additional reporting by Atul Prakash, Jessica Mortimer and Richard Leong; Editing by Dan Grebler)

Dollar up on Fed speculation; global stocks, oil up too