ORLANDO, Florida, May 22 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Wall Street rally evaporates

Investors drew breath on Thursday from the recent selling

across markets fueled by weakness in long-dated government debt,

and pushed up stocks, the dollar and bond prices. But Wall

Street's rebound lacked conviction and fizzled out, pointing to

a lackluster open on Friday.

In my column today I look at the dollar. There is no

shortage of economic fundamental reasons to be bearish in the

long term, but perhaps the recent selling has gotten a little

excessive. More on that below, but first, a roundup of the main

market moves.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. U.S. says it agreed with Japan that dollar-yen

reflects

fundamentals

2. U.S. 're-industrialization' could haunt

Treasuries: Mike

Dolan

3. U.S. Treasuries sell-off remains orderly, IMF

says

4. Global bond markets signal governments must pay

more to

borrow long-term

5. U.S. House narrowly passes Trump's sweeping

tax-cut

bill, sends on to Senate

Today's Key Market Moves

* U.S. stocks succumb to a wave of late selling and

give

up most of their earlier gains. The Dow and S&P 500 end flat,

and the Nasdaq rises 0.3%.

* Treasury yields ease as much as 6 basis points, but not

before

the 30-year yield hits a 19-month high of 5.16%.

* Britain's 30-year yield climbs to 5.60%, nearing April's

35-year

high of 5.65%, after weaker-than-expected UK fiscal data.

* Oil prices fall for a third day, dragged lower by

a

report that OPEC+ is discussing a production increase for July.

* Bitcoin notches another record high, rising for a third

straight

day to $112,000.

Selloff on nervy hold

The relative calm across markets on Thursday came amid

purchasing managers' index data that showed the downturn for

British and Japanese firms eased in May, and U.S. business

activity accelerated amid a truce in the trade war between

Washington and Beijing.

Investors latched onto the 'activity' side of the U.S.

report, and parked to one side the 'prices' data that showed

rising prices of imported goods for companies and consumers.

Inflationary pressures are intensifying.

Asian markets open on Friday to the latest producer price

inflation figures from South Korea, and consumer inflation data

from Singapore and Japan. The figures from Tokyo are expected to

show Japan's core inflation rose in April at its fastest pace in

two years, adding to pressure on the Bank of Japan to raise

interest rates.

Japan's bond market is at the epicenter of the global

turmoil in long-dated sovereign debt. This week a 20-year

auction drew the weakest demand since 2012, and 30- and 40-year

yields both surged to their highest levels on record.

Punchy inflation figures could push yields back up again,

which would further complicate life for the BOJ - it doesn't

want to intervene buying bonds, but it won't be able to stand by

and do nothing if yields continue to rise.

Inflationary pressures in the euro zone, meanwhile, appear

to be less intense. European Central Bank policymakers reckon

the inflation shock is "nearly over" and expect disinflationary

forces to dominate in the short term.

Investors will be paying close attention to a speech by

increasingly influential ECB board member Isabel Schnabel on

Friday. She is seen as an inflation 'hawk' and has been vocal in

her opposition to further rate cuts.

Fiscal worries in the United States loom large over markets,

despite the respite on Thursday, and the House of

Representatives' narrow passing of President Donald Trump's tax

bill will do nothing to alleviate those concerns. If anything,

it might add to them.

The bill aims to extend Trump's 2017 tax cuts, deliver new

tax breaks on tips and car loans and boost spending on the

military and border enforcement. All told, it will add some $3.8

trillion to the $36.2 trillion federal debt over the next

decade, the nonpartisan Congressional Budget Office estimates.

An auction of 10-year inflation-protected Treasuries on

Thursday was smoother than Wednesday's 20-year note auction, and

Federal Reserve Governor Christopher Waller said he still sees a

path to rate cuts later this year.

Overall then, it was a quieter, calmer day for markets on

Thursday. Can the week close out in the same vein?

Dollar sliding fast, but pace can't last

There are plenty of fundamental economic reasons to hold a

long-term negative view on the U.S. dollar, but the selling and

bearish sentiment currently smothering the greenback may be

overdone.

The dollar has lost 5% of its value against a basket of

major currencies since Trump's tariff 'Liberation Day' on April

2, and has fallen 10% since mid-January, when it was its

strongest in more than two years.

The economic and policy uncertainty caused by Trump's trade

war and its chaotic implementation have dimmed the dollar's

allure, while Trump's drive to rip up the world economic order

of the last 80 years and his attacks on Federal Reserve Chair

Jerome Powell have also alarmed investors.

What's more, if the Trump administration is to revive U.S.

manufacturing, reduce the trade deficit and rebalance global

trade, a weaker exchange rate must be part of the plan.

Clarity around some of these issues may not come for a

while. The U.S.-China tariff truce expires on July 9 and Trump's

tax-cut bill may not be finally approved until the July 4

recess, by which time the debt ceiling issue will be coming on

investors' radar again.

This is the backdrop against which many investors are now

reassessing their exposure to dollar-denominated assets. That

includes Treasuries, especially longer maturity bonds, which are

feeling the heat from burning worries over Washington's debt and

deficits. With the world's reserve currency and reserve asset

under pressure, it's little wonder U.S. stocks are

under-performing most global peers this year too.

Added together, that's a powerful headwind for the dollar,

despite the recent tailwind from the U.S.-Sino trade detente.

But as is often the case in financial markets, traders and

investors may have gotten a bit ahead of themselves.

Bearish sentiment and positioning are now at extreme levels,

according to some measures.

TOO MUCH, TOO SOON

Bank of America's latest global fund manager survey showed

that exposure to the dollar this month was the lowest since May

2006, a 19-year low. A net 17% of investors in the survey are

now underweight the dollar.

The same survey also showed that a "U.S. dollar crash on

international buyers' strike" is now considered to be the third

biggest tail risk to world markets, according to investors, only

marginally behind inflation forcing the Fed to raise interest

rates.

The multi-year process of "de-dollarization" may be underway

but a buyers' strike is highly unlikely, even in these febrile

and uncertain times.

While "real money" investors like pension and insurance

funds, sovereign wealth funds and reserve managers may

reallocate capital over the course of several months,

speculators and hedge funds move much quicker. And further.

Commodity Futures Trading Commission data shows that hedge

funds are holding an overall short dollar position - effectively

a wager that the currency will weaken - worth $17 billion, one

of the biggest short positions in years. Moreover, as recently

as January funds held a net long position worth $35 billion,

their most bullish dollar bet in nine years.

Positioning in the yen is particularly extreme - bullish

bets on the Japanese currency have never been bigger. With calls

mounting for the Bank of Japan to pause its rate hikes and

resume bond buying to stabilize the long end of the curve, the

yen's upside from here may be limited.

Oddly, the dollar's lurch lower has gone against the latest,

hawkish shifts in Fed rate expectations. U.S. rates futures

markets are now barely pricing in two quarter-point rate cuts

this year, with the first not coming until October. Compare that

with four cuts starting in June that traders were anticipating

only a couple of months ago.

There are also signs that the dollar's tight and

well-established correlation with U.S.-euro zone yield spreads

has broken down in recent weeks. But history suggests that

correlation will re-establish itself pretty quickly.

The dollar and exchange rates will be a key topic of

discussion among finance ministers and central bank chiefs from

the Group of Seven nations meeting in Canada this week. They

will no doubt also feature in Washington's bilateral talks with

key trading partners, particularly in Asia, as trade deals are

thrashed out.

The dollar's longer-term direction may be lower. In the near

term though, a pause or even correction may be warranted.

What could move markets tomorrow?

* South Korea PPI inflation (April)

* Singapore CPI inflation (April)

* Japan CPI inflation (April)

* UK consumer confidence (May)

* UK retail sales (April)

* ECB Board member Isabel Schnabel speaks in Bonn

* Moody's reviews UK and Italy credit ratings

* Canada retail sales (March)

* St. Louis Fed President Alberto Musalem and Kansas City

Fed

President Jeffrey Schmid speak at event in Arkansas

* G7 finance ministers and central bank chiefs meet in

Canada

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.