Dollar swoons as BOJ hikes, euro zone grows, yuan relieved

A look at the day ahead in U.S. and global markets from Mike Dolan

The dollar fell to its lowest of the year as the Bank of Japan delivered a long-awaited interest rate rise on Friday, euro business unexpectedly returned to growth and President Donald Trump's latest comments gave China a lift.

The first week of the new Trump Presidency has seen hectic parsing of the new administration's intentions - with markets second guessing Trump's every signal on trade or energy policy and deregulation.

Wall Street stocks clocked another record closing high on Thursday on a mix of earnings optimism and Trump's latest salvo on lowering oil prices to get interest rates down. Stock index futures held those gains early Friday, with Big Tech megacaps due to report fourth-quarter updates next week.

But it was the dollar that took the heat overnight from a sweep of overseas developments that may encourage global investors to rethink their overwhelming U.S. investment bias.

For a start, the yen perked up after the Bank of Japan finally delivered a quarter-point hike in its main policy interest rate to 0.5%, its highest since the 2008 global financial crisis. The reaction was calm, as the hike was considered neither a 'dovish hike' nor 'hawkish hike', in market parlance.

While BOJ revised up its inflation forecasts, underscoring its confidence that rising wages will keep inflation stable around its 2% target, BOJ governor Kazuo Ueda said there was no "preset idea" about likely further rate rises from here.

Japan's Nikkei stock benchmark ended flat.

But China's yuan was a bigger mover, as Trump told Fox News late on Thursday that his conversation with Chinese President Xi Jinping last week was friendly and he thought he could reach a trade deal with China.

While he said tariffs threats gave him the "power" to push China to curb fentanyl trafficking, he said: "I'd rather not have to use it."

The offshore yuan surged to its best level since November and Chinese stocks jumped 1-2% on Friday.

European stocks also jumped almost 1% to record highs and the euro hit its best levels in more than a month, topping $1.05 for the first time since mid-December, amid signs of life in euro zone business confidence this month.

HCOB's preliminary composite euro zone Purchasing Managers' Index, compiled by S&P Global, rose to 50.2 in January from December's 49.6, unexpectedly nudging above the 50 mark separating growth from contraction.

Expectations of another interest rate cut from the European Central Bank next week has improved sentiment, with markets expecting more to come after that.

Helped also by relief on what appears like a less draconian Trump tariff stance, the new president's insistence that the United States would guarantee supplies of liquefied natural gas to Europe and even hopes of Ukraine peace deal, euro zone stocks have gained twice as much as the S&P500 so far this year.

A possible lifting of the excessive gloom about Europe has prompted many asset managers to rethink yawning Transatlantic valuation gaps.

"There's too much pessimism on Europe," BlackRock CEO Larry Fink said at the World Economic Forum in Davos on Friday. "It's probably time to be investing back into Europe."

Corporate earnings updates helped, not least in the luxury sector. Burberry jumped 11.5% after the British brand reported a smaller-than-expected drop in quarterly comparable store sales, with Hugo Boss adding 2%, Moncler jumping 5% and Kering climbing 9.1%.

Back on Wall Street, corporate confidence is also lifted by brisk 10%-plus earnings growth and it was encouraged on Thursday as Trump demanded OPEC lower oil prices and called for world interest rates to fall.

The Federal Reserve is unlikely to oblige when it meets next week, with markets not expecting another quarter-point reduction in Fed rates until midyear.

But the Bank of Canada is likely to join the ECB in lowering borrowing costs in a big week ahead for central bank meetings.

Bitcoin popped back higher, meantime, as the U.S. Securities and Exchange Commission rescinded on Thursday accounting guidance long opposed by the cryptocurrency industry, an early Trump pivot away from the policies of the prior administration.

Trump ordered the creation of a cryptocurrency working group tasked with proposing new digital asset regulations and exploring the creation of a national cryptocurrency stockpile.

Key developments that should provide more direction to U.S. markets later on Friday:

* US 'flash' January business surveys from S&P Global, December existing home sales, final reading of University of Michigan's January consumer sentiment survey

* US corporate earnings: American Express, Nextera, Verizon, HCA

* World Economic Forum in Davos - including IMF Managing Director Kristalina Georgieva and European Central Bank President Christine Lagarde; WTO 'mini ministerial' meeting

(By Mike Dolan, editing by Timothy Heritage; mike.dolan@thomsonreuters.com)