Dollar gains on ECB stimulus talk, stocks decline

By Herbert Lash

New York, Reuters - The U.S. dollar strengthened against the euro and Japanese yen on Friday after the European Central Bank signalled it could deliver fresh monetary stimulus next month, while global equity markets eased after hitting record peaks this week.

Lower-rated euro zone bonds rallied after ECB President Mario Draghi gave his clearest signal yet that policymakers might act in June to stem slowing inflation and bolster a fragile economic recovery in the single currency bloc.

Italian, Spanish and Irish borrowing costs fell to record lows after the ECB raised the prospect that it could embark on an asset purchase program if inflation remained persistently low.

Spain and Italy, which two years ago were at the forefront of the euro zone debt crisis, badly need the recovery to gain traction to curb high debt levels.

Yields on Italian and Spanish 10-year bonds hit record lows of 2.90 percent IT10YT=RR and 2.87 percent ES10YT=RR respectively, before paring price gains as investors squared off positions into the weekend, traders said.

Irish 10-year bond yields dropped to lows of 2.65 percent IE10YT=RR, below the equivalent borrowing costs of the UK, which contributed significantly to its bailout four years ago.

The euro EUR= fell 0.52 percent to 1.3768 against the dollar. The dollar basket .DXY rose 0.69 percent and the dollar gained 0.12 percent against the yen JPY= to 101.77.

John Doyle, currency strategist at Tempus Inc in Washington, noted the euro's decline from Thursday eased a bit and that Draghi has tried in the past to talk down the currency's strength.

"Until the ECB actually acts, I don't see a sustained rally in the dollar. The market has been calling Draghi's bluff," Doyle said.

A measure of global equity performance, MSCI's all-country world index .MIWD00000PUS, fell 0.28 percent after advancing to its highest since November 2007 on Thursday.

In Europe, the pan-European FTSEurofirst 300 index .FTEU3 slipped 0.26 percent to close at 1,355.40, after hitting its highest level since May 2008 on Thursday.

On Wall Street, the major stock indices rebounded, but still traded near their level at the beginning of the year. The benchmark S&P 500 is up a bit more than 1 percent for the year, and has traded within a rough 35-point range for two months.

The Dow Jones industrial average .DJI added 9.99 points, or 0.06 percent, at 16,560.96. The Standard & Poor's 500 Index .SPX was down 0.07 points, or 0.00 percent, at 1,875.56. The Nasdaq Composite Index .IXIC was up 10.99 points, or 0.27 percent, at 4,062.48.

A rebound in so-called momentum growth stocks, such as Google Inc GOOG.O, Priceline Group PCLN.O and Twitter Inc TWTR.N, led the advance.

"We've seen days of investors trying to see if there's a bottom in these Nasdaq stocks," said Rick Meckler, president of hedge fund LibertyView Capital Management in Jersey City, New Jersey.

"There's some fear among investors that their steep fall-offs are a precursor of something to the broader market, and when they rebound, even temporarily, it seems to give confidence to the overall market," he said.

U.S. crude futures were rangebound as support from a drawdown in domestic crude stockpiles offset technical sell points that have kept oil in check. Brent crude was lower.

Brent crude for June LCOc1 settled down 15 cents to $107.89 a barrel. U.S. oil CLc1 fell 27 cents to settle at $99.99.

Gold fell, pressured by the euro's sharp decline from a 2-1/2 year high. U.S. COMEX gold futures GCM4 for June delivery settled down 10 cents an ounce at $1,287.60.

U.S. Treasuries drifted lower as the 30-year long bond US30YT=RR again surrendered price gains following an unexpectedly costly $16 billion government auction of new 30-year debt.

Yields on 30-year Treasuries, which have been favored in recent months by pension fund buyers, stood at 3.4659 percent, reflecting a price decline of 19/32.

The benchmark 10-year note US10YT=RR fell 6/32 to yield 2.6233 percent.

(Additional reporting by Francesco Canepa in London, reporting by Herbert Lash; editing by Andrew Hay)