Dollar rises, world stocks hold highs on March Fed rate hike bets

By Nigel Stephenson

LONDON (Reuters) - European stocks held near 15-month highs and the dollar strengthened against other top global currencies on Thursday on growing expectations the U.S. central bank will raise interest rates later this month.

Wall Street looked set to open barely changed after touching a record high on Wednesday, partly on the rates outlook, which was seen as a sign of confidence in the world's largest economy.

Federal Reserve Governor Lael Brainard became on Wednesday the latest central bank official to signal that a hike may be in the offing, saying an improving global economy and a solid U.S. recovery meant it would be "appropriate soon" to raise rates.

Federal fund futures prices suggest markets see a 72 percent chance of a 25 basis point hike at the March 14-15 meeting.

European shares held steady after Wednesday's strong showing and gains on Asian bourses, that helped push MSCI's global stocks index to another record high.

Although higher interest rates would raise U.S. companies' costs, they are also being viewed as a sign of confidence in the economy. Fed Chair Janet Yellen is due to speak on the economic outlook in Chicago on Friday. [FED/DIARY]

The pan-European STOXX 600 index was unchanged after adding 1.5 percent on Wednesday and hitting its highest since December 2015, as losses on real estate companies offset gains in utilities.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.1 percent, while Japan's Nikkei closed up 0.9 percent after hitting a 14-month high as a weaker yen helped exporters.

The dollar index, which measures the greenback against a basket of six major currencies, hit a seven-week high, up 0.3 percent.

The euro fell 0.3 percent to $1.0514, the yen fell 0.6 percent to 114.40 per dollar and sterling was flat at $1.2286, having earlier touched a six-week low at $1.2257.

In fixed income markets, U.S. Treasury yields pushed higher.

Rate-sensitive two-year yields matched Wednesday's peak of 1.308 percent, their highest since 2009.

German 10-year yields were higher on the day after data showing euro zone inflation hit the European Central Bank's 2 percent target last month, as expected.

Some analysts said the pick-up in inflation could fuel talk of a scaling back, or tapering, of the ECB's stimulus programme, which has driven euro zone bond yields lower.

"Psychologically, 2 percent inflation could be important and there will be more pressure building on the ECB to taper -- especially if the economy continues to grow," said KBC strategist Piet Lammens.

Oil prices fell for a third consecutive day after a record build-up in U.S. crude inventories and data showing Russian oil production was unchanged last month, signalling a pause in Moscow's efforts to curb production under a deal struck with the OPEC producers' club. Brent crude fell 79 cents to $55.57 a barrel.

"There is a very stale smell hanging over the market," Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen, told Reuters Global Oil Forum.

"I still see the risk of $50 a barrel before $60 on Brent, but have to acknowledge that we have so far seen very limited selling appetite."

The stronger dollar weighed on metals prices, which wee buoyed however, by signs of growing demand. Chinese factory activity expanded faster than expected in February, purchasing manager data showed on Wednesday.

Copper, a key Chinese import, fell 0.8 percent to $5,964 a tonne.

Gold fell 0.7 percent to $1,239 an ounce.

For Reuters Live Markets blog on European and UK stock markets, see: reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

(Additional reporting by Hideyuki Sano in Tokyo, John Geddie, Dhara Ranasinghe and Christopher Johnson in London; Editing by Hugh Lawson)