LONDON, Mar 29 (Reuters) The dollar held gains on Wednesday but government bonds fell and European shares were steady after the Federal Reserve signalled more U.S. interest rate rises to come following its 15th rate increase in as many policy meetings.
Euro zone government bond yields hit new multi-year highs, bracing for a further increase in U.S. rates and as European Central Bank policymakers stepped up their hawkish rhetoric.
In their first meeting under new chairman Ben Bernanke on Tuesday, Federal Reserve officials raised the benchmark federal funds rate target by 25 basis points to 4.75 per cent, the highest level since April 2001.
''They haven't given any indication that rates have peaked, which I think optimists have been hoping for,'' said Tristan Hanson, a global strategist at Cazenove.
''To that extent, the sell-off in U.S. bond and equity markets looks a reasonable reaction. Data in Europe have improved and I think there is some upward risk to ECB rates.'' U.S. stock index futures pointed to a modest bounce on Wall Street after stocks fell sharply in the previous session on worries higher rates will hit corporate profit growth.
U.S. Treasuries recovered slightly, a day after 10-year yields rose to near two-year highs. Benchmark 10-year notes were yielding 4.778 per cent, down from a high of 4.801 in the previous session.
The yield on the comparable euro zone 10-year bond was steady at 3.739 per cent, after rising to a one-year high of 3.763.
Dean Matthews, a trader at Monument Securities in London, noted that the 10-year Bund was not far from its key test at 3.80 per cent, last seen around January 2005.
Money market traders saw a 90 per cent or higher chance of an ECB rate rise in May. Separately, a Reuters poll of economists issued on Wednesday indicated respondents gave a 67.5 per cent chance of a rate hike to 2.75 per cent at the ECB's May meeting.
STERLING LOSES APPEAL Sterling fell against the dollar and the euro after UK mortgage approvals posted their first monthly fall since October 2004 and as the current account deficit came in wider than expected.
The pound was down 0.39 per cent on the day against the dollar at $1.7359. The dollar earlier gained on the outlook for a further hike in U.S. interest rates, which have now surpassed British ones for the first time since 2000.
The dollar clung onto broad gains made the previous day.
Further U.S. tightening will help the dollar to keep its yield advantage over other major currencies. Interest rates are near zero in Japan, 2.5 per cent in the euro zone and 4.5 per cent in Britain.
The dollar was at 117.92 yen, steady from late U.S. trade on Tuesday, when it rose 1 per cent. The euro was up slightly at $1.2014.
STOCKS FLAT Equities were steady, with the pan-European FTSEurofirst index of 300 leading shares flat at 1,365.2 points after a mixed set of results from retailers.
Shares in Ahold fell 5 per cent after the Dutch retailer cut its 2006 forecasts for its retail operations due to tougher-than-expected competition and cost pressures.
In contrast, UK grocer Sainsbury comfortably beat sales growth estimates and its shares rose 3 per cent.
The pan-European index is just off a 4-1/2-year high struck last week, but still up 7 per cent this year on robust earnings and a wave of mergers and acquisitions in Europe.
''The implied risk premium on global equities has been extremely attractive,'' said Cazenove's Hanson. ''And the kind of corporate activity you have seen in terms of cash bids is really an extension of the arbitrage between the return you can get from buying equities and low interest rates.'' Earlier in Asia, Tokyo shares outperformed, with the Nikkei closing 1.5 per cent firmer at a 5-1/2 year closing high at 16,938.4 points, led by gains in technology stocks.
Gold prices were steady at $563 an ounce, while U.S. crude oil prices were off 0.3 per cent below $66 a barrel.
REUTERS SD HT2020