Fed keeps lid on dollar, yields; Greece hurts stocks

Bond yields and the dollar fell on Thursday after the Federal Reserve signalled that US interest rates would rise more slowly than markets had expected, while Greece's drift closer to default pushed European stocks lower.

Euro zone finance ministers meet later in the day, but expectations are low that Greece and its international creditors will reach a deal to prevent the cash-strapped country from defaulting at the end of the month.

European markets are likely to take their cue from the news out of the Luxembourg meeting, along with the outlook for US monetary policy.

The Fed said on Wednesday that the economy was probably strong enough to support a rate increase by the end of the year. But it lowered its forecasts for 2015 economic growth because of a weak start to the year and reduced its federal funds rate forecast.

"With Greece, no news is bad news at this stage," said Holger Schmieding, chief economist at Berenberg Bank in London.

European stock markets were all lower in early trading.

The FTSEuroFirst 300 index of leading European shares was down 0.5% at 1,514 points, Germany's DAX down 0.7% at 10,901 points and France's CAC down 0.5% at 4,766 points.

Britain's FTSE 100 was down a quarter of a% at 6,663 points.

Overnight in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan inched up 0.1%, while Japan's Nikkei skidded 0.8% to a one-week low as the yen gained against the dollar.

Wall Street was called to open flat on Thursday. The Dow and S&P added 0.2% on Wednesday after the Fed's statement and comments from Fed chair Janet Yellen.

GOLDMAN CHANGES FED CALL

The twin forces of the Fed and Greek uncertainty kept a lid on global bond yields.

The 10-year US Treasury yield, which hit an eight-month high last week, fell as low as 2.27, a two-week low. The 2-year yield also hit a two-week low at 0.635%, marking a post-Fed decline of as much as 10 basis points.

The fall in US yields put the dollar under pressure, sending the greenback down 0.4% against the yen to 122.95 yen. That offset the Greek effect on the euro, and the single currency rose 0.2% to $1.1360.

The Fed's stance had tripped up some investors, who had expected the central bank to signal a rate hike as early as September. Goldman Sachs pushed back their forecast for the first rate hike to December from September.

"We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork," chief US economist Jan Hatzius wrote in a note.

The big mover on major currency markets, however, was the New Zealand dollar. It fell 1.2% after data showed the economy performed much worse than expected in the first quarter.

In European bond markets, Germany's 10-year yield fell 5 basis points to 0.76%. Last week, it was as high as 1.06%.

Other countries' yields also fell, but investors demanded a bigger premium for holding the bonds of countries such as Spain over safe-haven Germany. The 10-year Spanish/German spread widened 5 basis points to 155 basis points.

In commodities, Brent crude rose 0.2% to $64.00 a barrel. US crude fell 0.3% to $59.75.

Spot gold got a boost from the weaker dollar and lower US interest rate environment, rising $5 to $1,189 an ounce.