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Bonds and euro steady as ECB bolsters rate cut

expectations

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Wall Street opens higher after CPI-triggered drop

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Traders pricing out Fed cuts

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Japanese policymakers deliver intervention warning

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Graphic: World FX rates http://tmsnrt.rs/2egbfVh

By Marc Jones

LONDON, April 11 (Reuters) -

Reassurances that the European Central Bank still expects to

cut its interest rates soon helped settle market nerves on

Thursday, after a U.S. inflation scare had triggered the biggest

global bond and stocks selloff in months and left Japan's yen at

a 34-year low.

Euro and bond dealers had been anxious after Wednesday's

surprise U.S.

figures

had sent the dollar on its biggest tear in over a year

against the single currency by quashing hopes of a near-term Fed

rate cut, but they breathed a sigh of relief as the ECB stuck to

its guns.

"We are data dependent, we are not Fed dependent," ECB

chief Christine Lagarde said in response to questions after the

central bank held its

key interest rate

at the 4% it has been at since September.

If inflation continues to converge towards the ECB's 2%

target "in a sustained manner" she added, "it would be

appropriate to reduce the current level of monetary policy

restriction."

Europe's bourses which had sagged in line

with MSCI's main global index in morning

trading, edged up slightly as Lagarde laid out the plans

although an early lift on Wall Street also seemed to be helping

the mood.

Bond markets were still struggling however, after the

10-year U.S. Treasury yield - the main driver of

global borrowing costs - had shot back above 4.5% in its biggest

daily leap since September 2022 on Wednesday.

It was sitting at 4.57% in early U.S. moves, while Germany's

10-year bond yield - the European benchmark - dipped

fractionally to 2.42%, after rising 6 bps on Wednesday although

that was a small change compared to the 18 bps jump experienced

by Treasury traders.

"The key driver now remains U.S. rates," Amundi's Co-Head of

Emerging Markets/Fixed Income Sergei Strigo said, pointing to

Treasuries ploughing up through the 4.5% level again.

"The question is whether we are going to stick to these

levels or are going to go higher".

For ECB watchers, the bank has now kept its rates steady

since September, with policymakers apparently awaiting a few

more comforting wage indicators before pulling the trigger.

The currency bloc is now in its sixth straight quarter of

economic stagnation and the labour market is starting to soften,

an obvious contrast to the U.S. economy which continues to grow

robustly.

"While there are limits to how much ECB policy can diverge

from the Fed over time, there is nothing to stop the ECB from

cutting first or setting its own pace of cuts early on in the

easing cycle," Deutsche Bank's Jim Reid said.

However he also pointed to how markets had cut the

likelihood of an ECB cut by June back since the U.S. data shock.

It was at around 80% after Lagarde took questions, down from 91%

on Tuesday but also up from 75% before the ECB press conference.

Likewise for the Bank of England, it fell from 74% to 56% on

Wednesday Reid added, from 78% to 53% for the Bank of Canada and

for the Reserve Bank of Australia it went from 25% to 21%.

Riksbank Deputy Governor

Per Jansson

added his view too, saying the biggest threat to Sweden's

plans to cut rates next month, "come mainly from the

postponement of the rate-cutting plans of other central banks".

INTERVENTION WARNING

U.S. stocks bounced modestly in early moves

after Wall Street had fallen around 1% on Wednesday. The small

moves in Treasury yields ensured they stayed near their highest

levels since November too.

Overnight in Asia, MSCI's broadest index of Asia-Pacific

shares outside Japan slipped 0.4%, paring some

earlier losses, while Japan's Nikkei dropped 0.35%.

It was the beleaguered yen that was the main focus though,

after the roaring greenback knocked the Japanese

currency to a 34-year low of 153.24 per dollar.

It eased up slightly to 153.05 yen as the risk of government

intervention potentially looms large now. Japan's top currency

diplomat, Masato Kanda, warned on Wednesday that authorities

would not rule out any steps to respond to disorderly

exchange-rate moves.

"It's important for currency rates to move stably reflecting

economic fundamentals," Japanese Prime Minister Fumio Kishida

added on Thursday when asked about the yen's slide.

It may seem like an over-reaction to a U.S. inflation miss

of less than a tenth of a percentage point, but the heated March

consumer price update has jolted markets into doubting any U.S.

interest rate cut before the November election.

In commodities, metal prices were resilient in the face of a

strong dollar while oil held gains after advancing more than 1%

following an Israeli strike that killed three sons of a Hamas

leader, fuelling worries that ceasefire talks might stall.

Brent dipped 0.5% to just above $90 a barrel, and

U.S. crude inched down to $85.70 per barrel. Gold prices

gained 0.2% to $2,338.79 per ounce to keep them near this

week's record high.