European shares slide, dollar climbs off three-week low

By Marc Jones

LONDON (Reuters) - The U.S. dollar climbed off a three-week low and share markets were volatile on Friday, as unexpectedly weak U.S. economic data dampened expectations of an early scale-back of Federal Reserve stimulus.

The dollar was just off a three-week low against a basket of six key currencies although a surprise fall in German retail sales put pressure on the euro as it dipped 0.3 percent to $1.3016.

European shares dropped as much as 1 percent. Month-end factors and low volumes added to the data disappointment, but shares remained on course for their 12th straight month of gains having outperformed other parts of the world in recent weeks.

In Asia, Japan's Nikkei had bounced 1.7 percent at the end of its worst week in over a year.

"I still think if we look in the medium term, the momentum in equities is still intact," said Peter Garnry, strategist at Saxo Bank. "For this momentum to stop it would require some kind of a political or market hiccup in Europe," he added.

In the debt market, German Bund futures edged up and peripheral euro zone bonds weakened.

Euro zone inflation ticked up to 1.4 percent in May from 1.2 percent in April, according to data on Friday that may dampen the chances of an ECB rate cut next week although unemployment in the currency bloc hit a new record of 12.2 percent in April.

The latest grim euro zone jobless figures came a day after France and Germany agreed to draw up plans to have a full-time euro zone president, hold more frequent meetings and speed the disbursement of 6 billion euros in EU funds to fight youth unemployment.

Troubles also continue for those bordering the euro zone. Lending to Britain's businesses fell sharply in April, data from the Bank of England showed, dropping by the biggest margin so far in 2013, even as mortgage approvals edged higher.

Commodity markets remained squarely focused on the Federal Reserve's stimulus strategy which has been supporting global markets since the start of the financial crisis.

Copper, which has fallen 9 percent this year, was on track for its first monthly gain since January despite some profit-taking by traders, while oil dipped back below $101.75 as it bobbled along the bottom of its recent range and headed for its second week in the red.

"Given where the inventories are, given where the economies are, oil is very expensive at these levels," said Jonathan Barratt, chief executive of BarrattBulletin, a Sydney-based commodity research firm.

(Additional reporting by Toni Vorobyova; editing by Stephen Nisbet)