LONDON: Signs of progress in US budget talks lifted the dollar on Thursday and helped European stocks edge off four-week lows, though gains were limited by expectations any solution to the stalemate would be temporary.
Both Republican and Democrat parties earlier floated the possibility of a short-term increase in the country's $16.7 trillion debt limit to avoid a default and allow time for broader negotiations on the budget.
The dollar strengthened against most major currencies and was at a two-week high as European trading gathered pace. Stocks also got off to a positive start, with the pan-European FTSEurofirst 300 up 0.8 percent and looking to snap a three-day losing streak.
Vasileios Gkionakis, Global Head of FX Strategy for UniCredit in London, said positive signals for the dollar were reinforced by the minutes of last month's Federal Reserve meeting published on Wednesday.
"The Fed minutes reiterated that tapering (of monetary stimulus) will happen during this year... but I think it's largely that there are some discussions between the Republicans and Democrats" over the debt ceiling, he said.
With the dollar on the up, the euro was already on the back foot, and there was further pressure after French industrial production rose 0.2 percent in August from July, falling short of expectations.
In Asian trading, Tokyo's Nikkei share average advanced 0.9 percent to its highest in a week while shares elsewhere lost ground.
U.S. stock futures pointed higher, bolstering hopes of a second day of modest gains after sizable falls early in the week.
DEAL OR NO DEAL
Investors have expected the Republicans and Democrats to cut a deal by an Oct. 17 deadline to raise the debt ceiling, though their nerves are tested each day that passes without an agreement.
It is unclear how long a short-term deal would be effective for, but any move to raise the borrowing limit would at least stave off a possible debt default.
"It's a step forward for the market to resume risk-taking, though we are not too optimistic," said Isao Kubo, an equity strategist at Japan's Nissay Asset Management. "Investors are cautiously buying back."
Strains in short-term U.S. interest rates and funding markets have also increased as the deadline nears.
There were few signs of early nerves on European bond markets, however, with German government bonds typically favoured by risk sensitive investors edging lower as higher-yielding euro zone periphery debt fared better.
The euro was hovering at a near two-week low of at $1.3500 versus the dollar, which was up 0.4 percent at 97.66 yen, building on Wednesday's 0.5 percent rise as it pulled away from a five-week low earlier this week.
News that the Federal Reserve's decision last month not to reduce its $85 billion-a-month bond-buying programme was a "close call" also helped buoy the U.S. currency.
"This is consistent with our expectations that the Fed will taper purchases at the upcoming December meeting. That said, the ongoing federal government shutdown and upcoming expiration of the debt ceiling suggests that the decision to taper could be pushed into 2014," Barclays Capital said in a note.
As the dollar regained its footing, gold eased 0.3 percent to around $1,302.5 an ounce, adding to Wednesday's 0.9 percent decline.
Oil rose on news Libya's prime minister has been seized by armed gunman in a Tripoli hotel.
"Everybody is watching this, and I believe it can move the market," said Ken Hasegawa, a commodity sales manager at Newedge Japan, although he doubted the rise would be big unless there was any serious disruption to oil supply.
Brent oil rose towards $110 a barrel and U.S. crude prices added 0.5 percent to about $102.19 a barrel. U.S. prices had tumbled 1.9 percent on Wednesday after the largest weekly build-up of U.S. stocks in a year added to the worries of a market already concerned about the budget deadlock. - Reuters
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