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Europe's STOXX up 0.2%, Asia shares near two-year high

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Fed's cautious optimism raises hopes of imminent rate cut

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Dollar on front foot, yen still pressured

(Updates throughout for European market open)

By Lawrence White

LONDON, July 10 (Reuters) - Shares gained and the dollar

firmed on Wednesday, after cautious but encouraging remarks on

inflation by Federal Reserve Chair Jerome Powell the day before

raised expectations for imminent U.S. rate cuts.

The pan-European STOXX 600 index rose 0.2% by 0740

GMT, led by gains in travel and leisure shares. MSCI's broadest

index of Asia-Pacific shares outside Japan eased

0.06%, but remained close to the more than two-year high hit at

the start of the week.

Speculation around the timing of interest-rate cuts has been

dominating markets worldwide this year, as investors try to

ascertain the moment at which policymakers feel they are

bringing inflation under control.

The New Zealand dollar slid on Wednesday after its

central bank held its cash rate steady at 5.5% on Wednesday as

expected, but signalled confidence inflation was expected to

return to its target range of 1% to 3% in the second half.

The kiwi fell more than 0.7% after the decision and

was last at 0.54% lower at $0.6092, as traders sharply ramped up

bets of RBNZ rate cuts later this year.

"Them kind of saying the CPI is going to drop back into

target in the second half of this year... that CPI expectations

could normalise more rapidly, I think that contributed," said

Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

"Compared to the more hawkish statement, the tone they had

in the May meeting, that stood out."

Swaps now imply more than 30 basis points worth of easing in

October, as compared to 16 bps before the outcome.

The Aussie, meanwhile, rallied 0.6% to an over one-year high

against the New Zealand dollar, with the former

underpinned by wagers that the next move in Australian rates

might be up given inflation is proving stubborn.

WAKE ME UP WHEN SEPTEMBER ENDS

Stocks, having slumbered for much of the year, have been

energised on growing expectations of a Fed easing cycle likely

to commence in September, with Powell saying on Tuesday that the

U.S. is "no longer an overheated economy".

However, he provided little clues on how soon those rate

cuts could come.

"If the labour market shows signs of cooling, so long as

inflation data doesn't move higher and stays where it is, that

might be enough to still deliver some music from the Fed," said

Rob Carnell, ING's regional head of research for Asia Pacific.

The chances of a September cut have risen to more than 70%

compared to a near-even chance a month ago, according to the CME

FedWatch tool.

The closely-watched monthly U.S. inflation report is due on

Thursday, where core consumer prices are expected to hold

steady in June.

S&P 500 futures gained 0.06%, while Nasdaq

futures firmed 0.16%.

DOLLAR RESILIENT

Still, the rise in U.S. rate-cut expectations has done

little to sway the dollar, which remained broadly on the

front foot on Wednesday.

That left sterling and the euro little

changed at $1.2795 and $1.082, respectively.

Against the yen, the dollar rose 0.08% to 161.45,

as the Japanese currency remained under pressure from the stark

interest rate differentials between the U.S. and Japan.

But data on Wednesday showed Japan's wholesale inflation

accelerated in June as the yen's declines pushed up the cost of

raw material imports, keeping alive market expectations for a

near-term interest-rate hike by the central bank.

The Bank of Japan said on Tuesday some market players called

on the central bank to slow its bond buying to roughly half the

current pace under a scheduled tapering plan due this month.

In commodities, oil prices ticked lower as the impact from

Hurricane Beryl eased and inflation data highlighted stubbornly

weak consumer demand in top crude importer China.

Brent futures fell 0.53% to $84.21 a barrel, while

U.S. West Texas Intermediate (WTI) crude eased 0.45% to

$81.04 per barrel.

Gold gained 0.36% to $2,372.12 an ounce.