GLOBAL MARKETS-Dollar, stocks fall as Fed heads for QE2

Published 09/22/2010, 06:15 AM
Updated 09/22/2010, 06:20 AM
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* European shares, U.S. stock futures lower after Fed

* Asia, emerging stocks help MSCI world equity index

* Dollar hits 5-month low vs euro; gold sets record highs

By Natsuko Waki

LONDON, Sept 22 (Reuters) - The dollar hit a five-month low against the euro while developed market shares slid after the Federal Reserve opened the door to more monetary easing, signalling the depth of its concern over growth.

Gold hit record highs on the prospect of more U.S. easing and a weaker dollar, while expectations of more cash flowing through the system boosted shares and currencies in developing economies that are performing much better than Europe and the United States. The Fed said it stood ready to pumping hundreds of billions of new dollars into the economy -- a second round of so-called quantitative easing -- although it made no policy shift at the end of a one-day meeting.

European shares and Wall Street futures fell, focussing more on what the Fed's message said about growth than the measures it would take to boost the economy. They are also uncertain if any moves will be enough.

"Investors are realising things will have to deteriorate first in the economy before the Fed is going to intervene," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels said.

The FTSEurofirst 300 index fell more than one percent, while firmer Asian and other emerging market shares helped MSCI world equity index rise 0.3 percent.

The Thomson Reuters global stock index was steady on the day. U.S. stock futures were down around 0.2 percent.

Emerging stocks rose 0.4 percent.

Markets' major concern in Europe remains the level of government debt and persistent worries about Ireland's fiscal deficit pushed the spread of its 10-year bond yield over German Bunds to euro lifetime highs of 425 basis points.

The Portuguese spread also hit a euro lifetime high of 406 bps, before dropping back to 391 bps after a successful bond auction. Bund futures rose 0.8 percent.

The dollar fell 0.7 percent against a basket of major currencies. The euro rose as high as $1.3390, its strongest since late April. This in turn helped gold, which rose towards $1,295 an ounce. U.S. crude oil rose half a percent to $75.36 a barrel.

"It looks like the hurdle for QE has been lowered and the Fed is more concerned about the inflation picture," said Nick Stamenkovic, rate strategist at RIA Capital.

"If data shows disinflation pressures are growing and growth is slowing then the Fed could pull the trigger as early as November."

(Additional reporting by Joanne Frearson; editing by Patrick Graham)

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