LONDON, Feb 23 (Reuters) European shares edged lower on Thursday as strong German business sentiment data stoked worries of more rate rises from the European Central Bank, and the dollar struggled after Japan said it would eventually raise its rates.
The dollar fell as low as 116.94 yen, a one-week low and down more than one per cent on the day, as its yield allure took another hit. The euro also hit a one-week low at 139.55 yen.
U.S. Treasuries lost some ground after U.S. weekly initial jobless claims declined to 278,000 in the latest week against forecasts of a slight rise to 300,000.
Expectations the ECB will raise interest rates to 2.5 per cent next Thursday after Germany's Ifo business confidence index hit its highest level in more than 14 years lifted the euro 0.4 per cent against the dollar to .1955 but knocked European shares.
''The Ifo index lifted markets briefly before investors realised that the European Central Bank might now raise interest rates not just in March but also later,'' said Guenter Senftleben, a strategist at Bankgesellschaft Berlin.
The FTSEurofirst 300 index of leading European shares shed early gains to trade down 0.2 per cent at 1,355.60 point but was still within sight of 4-1/2 year highs.
Dealers were looking for a slightly lower start from Wall Street with the risk of some profit-taking if oil prices started moving up again and some concerns over earnings, but relief over tame U.S. inflation data for January bolstered the mood.
The Dow hit its highest level since June 2001 after consumer price data on Wednesday offered reassurance that the U.S.
Federal Reserve was unlikely to have to raise interest rates further than expected.
Markets are now awaiting speeches due later on Thursday from several non-voting Federal Reserve officials, including Dallas Fed's Richard Fisher, for further clues on interest rate thinking.
The Fed is widely expected to boost overnight rates to 4.75 per cent in March from the current 4.5 per cent, with more market players forecasting the rate to climb to 5 per cent by mid-year.
OIL LOWER, ASIAN SHARES UP U.S. crude oil futures slid below a barrel, adding to steep falls the day before, ahead of U.S. supply data expected to show another increase in already swollen inventories.
The weaker oil prices helped boost Asian shares, adding to optimism over Japan's economic recovery and relief over U.S.
inflation. Japan's Nikkei rose 2 per cent, while MSCI's index of non-Japan Asian shares was up 0.9 per cent.
Bank of Japan Governor Toshihiko Fukui added to the upbeat mood about the state of the economy, suggesting the 5-year-old policy of flooding the financial system with money would end soon and that rates would rise to a neutral level at some point.
EUROZONE BONDS EASE Eurozone government bond futures eased away from recent 1-month highs and interest rate futures also softened after the Ifo institute said its main German business climate index came in at 103.3 in February, versus a revised reading of 101.8 in the previous month and expectations of 101.5.
''These numbers will corroborate the ECB's upbeat outlook for stronger recovery this year and give them more leverage to push rates higher in the coming months,'' said David Brown, Chief Economist at Bear Stearns.
''It looks like a quarter point ECB rate hike should be in the bag next week.'' The March Bund future fell to the day's low of 120.64 from 120.94 before the data was released. Earlier in the session, it matched Wednesday's 1-month high of 121.05.
The 10-year U.S. Treasury was down 8/32 in price on the day, taking the yield up to 4.559 per cent.
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