Dollar upended by rates reversal, stocks calm for now

By Wayne Cole

SYDNEY (Reuters) - The dollar languished at its lows for the year on Thursday as a drumbeat of hawkish comments from major central banks signalled the era of easy money might be coming to an end for more than just the United States.

Support for the dollar eroded as investors realised the U.S. Federal Reserve might not be the only game in town when it came to higher interest rates.

In Britain, Bank of England Governor Mark Carney surprised many by conceding a hike was likely to be needed as the economy came closer to running at full capacity.

The Bank of Canada went further, with two top policymakers suggesting they might tighten as early as July.

That followed comments earlier in the week from European Central Bank President Mario Draghi that stimulus might need to be toned down so it does not become more accommodative as the economy recovers.

ECB sources tried to hose down the talk but could not stop the euro hitting a one-year high against the U.S. dollar. Early Thursday, the single currency was taking in the view at $1.1381 having climbed almost three percent in as many sessions.

The Canadian dollar scored its biggest gain in three months to reach C$1.3037 per dollar, while sterling rebounded to $1.2941 .

Against a basket of major currencies, the dollar sank to its lowest since early November at 96.005 as volatility returned with a vengeance.

"Central banks will be very cautious in their approach," said Martin Whetton, a senior rates strategist at ANZ.

"But once they start tightening in concert, and their bloated balance sheets start unwinding, it is fair to say that bonds, equities, house prices and other asset markets will face stiffer headwinds than they have for a long time."

The squall had already driven German short-term yields to their highest in a year, while yields on U.S. 10-year Treasuries were up 10 basis points so far this week at 2.22 percent .

Yet the prospect of higher interest rates bolstered banking stocks and helped the S&P 500 score its biggest one-day percentage gain in about two months on Wednesday.

The Dow rose 0.68 percent, while the S&P 500 gained 0.88 percent and the Nasdaq 1.43 percent.

Financials <.SPSY> gained further after hours as the Fed approved plans from the 34 largest U.S. banks to use extra capital for stock buy backs and dividends.

Asia followed on Thursday with Japan's Nikkei <.N225> adding 0.5 percent and Australia <.AXJO> 0.6 percent. MSCI's broadest index of Asia-Pacific shares outside Japan edged ahead by 0.4 percent.

The weaker U.S. dollar helped nudge gold up to $1,249.20 an ounce .

Oil recouped a little of its recent steep losses after a weekly decrease in U.S. production offset a surprise build in crude inventories in the world's top oil consumer. [O/R]

On Thursday, U.S. crude firmed 7 cents to $44.81 per barrel and Brent added 6 cents to $47.38.

(Reporting by Wayne Cole; Editing by Eric Meijer)