Dollar steadies as Fed minutes weigh on stocks, yuan

By Tom Finn

LONDON (Reuters) - The dollar held near a one-week high on Thursday and stocks were mixed after minutes showing the Federal Reserve may favor more rate hikes next year.

S&P 500 futures pointed to a softer open after a flat session on Wednesday, while stocks in Europe resisted earlier declines in Asia to rise on the back of strong earnings.

The 10-year Treasury yield rose to as high as 3.21 percent after minutes showed Fed officials appeared to favor an eventual move in rates above the level they see as neutral for the U.S. economy.

China's stock markets were hit hard in a gloomy session for Asian equities. The yuan fell to a two-month low as the U.S. Treasury refrained from naming China a currency manipulator, while at the same time increasing scrutiny of Beijing's exchange-rate policy.

China's premier warned of risks to the economy from an escalating tariff war with the United States.

European shares, though, largely shrugged off the disappointment in Asia. Frankfurt's DAX and Paris's CAC both rose 0.3 percent and London's FTSE traded 0.1 percent lower. A pan-European equity index rose 0.6 percent.

Minutes of the Federal Reserve's Sept. 25-26 meeting showed every Fed policymaker backed raising interest rates last month and also generally agreed that borrowing costs were set to rise further.

That reinforces expectations that U.S. yields will rise further despite President Donald Trump's view that the Fed is tightening too much.

"Corporates have done incredibly well but it's clear we are going into monetary tightening in the U.S. and that makes people worried about global debt having gone up so much in recent years," said Peter Lowman, CIO at Investment Quorum, a UK wealth manager.

At a time of simmering trade war tensions, "people are perhaps taking chips off (the) table and maybe going into cash and short-dated bonds," he said.

Overall, third-quarter earnings for S&P 500 companies are seen growing 21.8 percent, according to I/B/E/S Refinitiv.

The greenback held on to gains on Thursday. Against a basket of its rivals, the dollar rose for a third consecutive day, trading broadly flat at 95.517. That checked emerging-market gains.

"The last thing emerging markets, or the U.S. yield curve or equities, want is a reminder that U.S. rates are going to keep going up," Rabobank analysts told clients in a note.

The euro changed hands at $1.1518, holding steady versus the greenback, after losing 0.65 percent on Wednesday. The euro has lost just under 3 percent of its value versus the dollar over the last three weeks.

Major currencies have shown limited reaction after the U.S. government late on Wednesday refrained from naming China as a currency manipulator.

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In its semi-annual currency report, the U.S. Treasury Department said a recent depreciation of China's yuan currency will likely exacerbate the U.S. trade deficit, and U.S. officials found Beijing appeared to be doing little to directly intervene in the currency's value.

"The U.S. refrained from labeling China a currency manipulator, but dialed up the rhetoric against its currency practices," said Sue Trinh, Head of Asia FX Strategy, RBC Capital Markets.

The yuan fell 0.2 percent to 6.9443 per dollar in offshore trade. That is the weakest level since a 1-1/2-year low of 6.9587 touched in August.

STERLING SUPPORTED

In Europe, an EU leaders' summit with British Prime Minister Theresa May yielded little obvious progress on a Brexit deal being negotiated between Britain and the bloc.

Sterling did, however, turn positive on Thursday after May confirmed she was open to discussing an extension of the transition period after Brexit.

Oil steadied on Thursday as support from ongoing tensions over the disappearance of a prominent Saudi journalist offset a big drop overnight due to a jump in U.S. crude stockpiles.