Dollar wilts to 6-1/2 month low; world shares drift

By Marc Jones

LONDON (Reuters) - The dollar fell to a 6-1/2 month low on Tuesday as investors looked past signs the U.S. economy is emerging from a winter-induced slowdown and focused on the improving picture in Europe.

The greenback was hurt by U.S. bond yields struggling to pull out of their recent troughs, suggesting few were betting on future Federal Reserve interest rates hikes. The dollar index, which measures it against six other major currencies, slid as the British pound and euro both gained.

The European Central Bank is expected to repeat its concern about the strong euro's impact on already-low inflation when it meets on Thursday. But economists doubt the ECB will cut its record-low interest rates again.

The euro climbed to $1.3926 in European trading, popping out of a $1.3864-$1.3887 range, and rose to 141.99 versus the yen. The greenback steadied at 102.02 against the Japanese currency.

"It's an anti-dollar trade," said Gavin Friend, a currency strategist at National Australia Bank in London. "It didn't go higher on the data (on Monday), so it's got to go down."

European share markets drifted sideways. U.S. economic news and near-record-low global borrowing costs helped soothe jitters about unrest in Ukraine and offset weak results from Barclays and Aberdeen Asset Management.

More than 30 pro-Russian separatists were killed in fighting near the east Ukraine rebel stronghold of Slaviansk, Interior Minister Arsen Avakov said on Tuesday, as Russia announced plans to beef up its Black Sea warship fleet.

The simmering unrest lifted safe-haven gold and pushed wheat prices -- Ukraine and Russia are both big grain growers -- to a 13-month high.

Russian stocks touched a one-week high, however, benefiting from lack of actual military intervention by Moscow, and as emerging markets benefitted generally from the ultra-low global rate outlook.

Among Europe's main bourses, Britain's FTSE 100 and France's CAC 40 both ran out of steam after an early push to leave them little changed on the day, along with the DAX in Germany. Markets in Spain, Portugal and Italy again set the pace with gains of 0.3, 0.2 and 0.5 percent.

Yields on the peripheral countries' lower-rated bonds also remained at multi-year - in some cases, all-time - lows. Investors welcomed Portugal's plans to exit from its bailout and continued to bet on some future easing of ECB monetary policy.

"It's a normal step," said KBC strategist Piet Lammens as Portuguese 10-year yields touched an eight-year low. "Sentiment in the market is very strong."

Money-market rates, another of the factors the ECB has said could drive it into action, also relaxed as the recent uptake of unlimited cheap ECB funding filtered through.

TREASURY YIELD

Despite holiday-thinned trading In Asia, stock markets did get a fillip from the Institute for Supply Management's U.S. services-sector index. It rose to 55.2 in April, the fastest pace in eight months and easily topping forecasts. A reading above 50 indicates expansion.

The data added to evidence that the U.S. economy is emerging from a slowdown induced by a particularly harsh winter. They also provided a welcome offset to worries about China.

The CSI300 index of the largest Shanghai and Shenzhen A-share listings ended steady on the day. Early gains were limited by weakness in the property sector as investors braced for any signs of financial distress among developers.

"The U.S. is showing signs of recovering from particularly slow momentum in Q1, driven to a significant extent by adverse weather effects, and the euro area remains on a stable, gradual upward trajectory," noted analysts at Barclays.

With little data coming later, the Dow, S&P 500 and Nasdaq all pointed to only modest 0.05-0.2 percent gains when trading resumes.

Bonds took the opposite course, with Treasuries making back some of ground they had surrendered on Monday. Yields on 10-year paper inched up to 2.62 percent in Europe, having been as low as 2.57 percent.

The U.S. Treasury auctions three-, 10- and 30-year debt this week, which will be a useful litmus test of investor demand.

(Additional reporting Marius Zaharia in London and Wayne Cole in Sydney Editing by Larry King)