Currency war fears ease; oil hits six-year low

By David Gaffen

NEW YORK (Reuters) - Bond yields rose in major markets on Thursday after China's central bank reassured investors there was no reason for its currency to keep falling, but oil prices fell to six-year lows on supply concerns.

Despite the renewed calm in markets, the yuan weakened for a third day and some forecast further declines in the face of a weak economy, even as People's Bank of China Vice-Governor Yi Gang dismissed talk of a deeper devaluation.

"They're taking the Chinese central bank at its word, but I'm still taking those comments with a pinch of salt," said Hantec Markets analyst Richard Perry.

The PBOC set its guidance rate at 6.4010 per U.S. dollar prior to the market opening, weaker than the previous fix of 6.3306. The gap between the guidance rate and the traded spot market rate narrowed sharply as banking sources said the PBOC had stepped up intervention to stabilize prices. It was lately traded at 6.3982.

Traders remained cautious. Sources had told Reuters this week some powerful voices in the government were pushing for an even deeper yuan devaluation to help China's struggling exporters.

Oil prices neared their nadir for 2015 after refinery outages and data showing inventory builds revived concerns about oversupply.

U.S. crude CLc1 settled down $1.07 at $42.23 a barrel, after setting a session bottom at $41.91, its lowest since March 2009 when the financial crisis was wreaking havoc on oil prices. Brent crude LCOc1 slipped 1.1 percent to $49.13.

Investor fears of a currency war or substantial asset depreciation eased, but U.S. equities were hit by weak energy prices, dragging shares of those companies lower.

U.S. equities, which had rebounded from steep losses Wednesday, were mixed. The Dow Jones industrial average (DJI) rose 5.74 points, or 0.03 percent, to 17,408.25, the S&P 500 (SPX) fell 2.66 points, or 0.1 percent, to 2,083.39 and the Nasdaq Composite (IXIC) dropped 10.83 points, or 0.2 percent, to 5,033.59.   

The pan-European FTSEurofirst index of leading 300 blue-chips (FTEU3) rose 0.9 percent, while the MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) edged up 0.5 percent.

U.S. FED FOCUS

The recovery in equities dimmed the allure of safe-haven government debt, pushing up U.S. and European bond yields.

German 10-year bond yields were 3 basis points higher at 0.63 percent while benchmark U.S. 10-year yields (US10YT=RR) were up 6 basis points at 2.19 percent, following a lackluster auction on Wednesday.

The dollar, which had also suffered as investors pared back bets that the Federal Reserve's long-awaited interest rate hike would come as early as its Sept. 16-17 meeting, rebounded on Thursday.

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"With the suggestion that the PBOC's currency adjustment is mostly complete at this point right now, one has to think that a September Fed hike is still on the table," said Mazen Issa, senior currency strategist at TD Securities in New York.

The dollar index (DXY) was up 0.1 percent at 96.373, rebounding from a one-month low of 95.926 hit on Wednesday. U.S. retail sales rebounded in July as households boosted purchases of automobiles and a range of other goods, suggesting solid momentum in the economy.

The euro was little changed at $1.1155 after scaling a one-month peak of $1.1215 on Wednesday, helped by the unwinding of euro-funded carry trades in the yuan and other emerging market currencies.