Dollar retreats from 14-year high, banks pull European shares lower

By Nigel Stephenson

LONDON (Reuters) - The dollar eased back from 14-year highs as bond yields fell on Wednesday while concerns over banks pulled European shares lower, as momentum from Asia and Wall Street faded.

A widespread conviction that incoming president Donald Trump's policies will boost the U.S. economy have driven up the dollar and Treasury yields since his election in early November and pushed U.S. stocks to record highs.

The Dow Jones industrial average hit a record closing high on Tuesday and came within 25 points of the 20,000 mark -- a level it has never breached.

However, some investors seemed ready to take profits on Wednesday in thin pre-Christmas trade.

The dollar index, which measures the greenback against a basket of major currencies, fell 0.1 percent, having risen 5 percent this year to hit a 14-year peak on Tuesday.

U.S. 10-year Treasury yields, which hit their highest in more than two years last week after the Federal Reserve raised interest rates and forecast more hikes than most investors had expected, fell 1 basis point to 2.56 percent.

Benchmark 10-year yields have risen almost 80 bps since early November.

The euro, which touched a 14-year low on Tuesday, rose 0.2 percent to $1.0403 while the yen gained 0.2 percent to 117.62.

Many analysts still see the dollar rising further, possibly to parity with the euro.

"The euro is in a fight between short-covering pressure and political angst. Economics doesn't come into it at all. If Dow 20,000 is just a number but a magnet all the same, euro parity with the dollar will be every bit as magnetic," said Kit Juckes at Societe Generale.

"We'll get there and get over-excited before too long."

The Swedish crown hit a two-month high against the euro after the Riksbank kept interest rates on hold and expanded its asset-buying programme.

European shares were slightly lower. The pan-European STOXX 600 index dipped 0.1 percent, having hit an 11-month high on Tuesday, led lower by banking shares.

Italy's Monte dei Paschi di Siena, which must raise 5 billion euros by the end of the month to avoid state intervention, was again in focus, with its shares down 17 percent.

Spanish lenders also fell after the European Court of Justice overturned a Spanish court ruling that limited the banks' liabilities for so-called floor clauses in mortgage contracts.

NIKKEI LOWER

MSCI's broadest index of Asia-Pacific shares outside Japan inched up 0.1 percent after a string of losses. Tokyo's Nikkei share average also fell, pulling back from earlier one-year highs to close down 0.3 percent.

However, U.S. stock futures traded marginally higher, indicating the Dow Jones industrial average, which hit a record closing high on Tuesday, could get closer to the 20,000 mark.

In euro zone debt markets, German 10-year government bond yields fell 1.9 bps to 0.24 percent. Among lower-rated bonds. Spanish 10-year yields fell to five-week lows and Italian equivalents also fell on concerns over banks.

The premium over Spain that Italy would pay to borrow in bond markets briefly topped 50 bps for the first time since just after a failed Dec. 4 referendum on constitutional reform triggered Italian premier Matteo Renzi's resignation.

Oil prices rose on an unexpected fall in U.S. crude inventories. Brent crude, the international benchmark, rose 0.8 percent to $55.79 a barrel.

Gold edged up 0.2 percent to $1,133 an ounce as the dollar slipped.

"We are seeing quite a lot of volatility. It is driven by the direction of the U.S. dollar. (Gold) is just marking time before it makes its next big move. It is in a very, very strong down channel," said Jeffrey Halley, senior market analyst at OANDA.

(Additional reporting by Wayne Cole in Sydney, Jamie McGeever and John Geddie in London; Editing by Mark Trevelyan)