By Sinéad Carew and Naomi Rovnick
NEW YORK/LONDON (Reuters) -The dollar fell sharply against the yen for the second straight day, raising questions as to whether Japan was intervening, while a global equities index rose on Friday as investors turned their focus to U.S. Federal Reserve interest-rate cuts.
The benchmark 10-year U.S. Treasury yield lost steam after earlier gaining modestly when the producer price index (PPI) report showed prices rose more than expected in June.
But investors still seemed to be celebrating Thursday's lower-than-expected consumer price index (CPI) report, which boosted bets that the Fed's rate cuts would start in September.
"As much data and earnings reports as there were this week, all the market seems to care about is the CPI report. It was more confirmation inflation is fading," said Emily Roland, co-chief investment strategist at John Hancock Investment Management. "PPI tends to be more volatile so markets are shrugging it off."
And while the University of Michigan's survey showed U.S. consumer sentiment fell in July, investors focused on the fact that it showed improving expectations for inflation for the next year and beyond.
"Right now we're living in a 'bad news is good news' environment. Disinflation is good in some ways but it's also a signal that growth is slowing," Roland said. "We're not there yet. Right now we're signaling a soft landing, but we don't have the clarity yet to know that the Fed can achieve that. Momentum in markets is a powerful force."
Also on Friday, the second-quarter earnings season started with the S&P 500 bank index underperforming the broader market as big U.S. banks' earnings and guidance did not impress.
"Earnings season hasn't gotten off to a great start but we're still very early. We're seeing some companies talking about their ability to control expenses. We're looking for more clarity as the season goes on," said Celia Hoopes, portfolio manager at Brandywine Group in Philadelphia.
On Wall Street, the Dow Jones Industrial Average closed up 247.15 points, or 0.62%, to 40,000.90, the S&P 500 advanced 30.81 points, or 0.55%, to 5,615.35 and the Nasdaq Composite gained 115.04 points, or 0.63%, to 18,398.45.
MSCI's All Country World Price index rose 4.28 points, or 0.52%, to 828.55, after earlier hitting a record intraday high. The index was set for its seventh record high close in nine sessions and a weekly gain of around 1.3%.
Europe's Stoxx share index earlier closed up 0.88% after hitting its highest level since June 7 and eyeing a second consecutive week of gains for the first time since May.
In currencies, the yen jumped to an almost four-week high against the dollar, putting traders on alert for signs of fresh intervention by Japan, which likely stepped in on Thursday to prop up a currency still close to its lowest in 38 years.
While Tokyo had not confirmed any move on Thursday to prop up the flailing yen, the Bank of Japan's daily operations report on Friday suggested between 3.37-3.57 trillion yen ($21.18-22 billion) had been spent on strengthening the currency.
"If they intervened (on Thursday), it makes it likely that they intervened (on Friday). And I think it's good strategy to keep the market off balance," said Steve Englander, head of global G10 FX research and North American macro strategy at Standard Chartered (LON:STAN) Bank NY Branch.
Against the yen, the dollar weakened 0.6% to 157.85. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.24% at 104.09, with the euro up 0.36% at $1.0904.
Meanwhile, sterling strengthened 0.57% to $1.2982, hitting its highest level in almost a year and after comments from Bank of England policymakers and better-than-forecast GDP data this week, dampening bets for an August rate cut.
In Treasuries, yields turned lower with the 2-year yield hitting its lowest level since early March in its second straight day of declines.
The yield on benchmark U.S. 10-year notes fell 1.2 basis points to 4.181%, from 4.193% late on Thursday while the 30-year bond yield fell 1 basis points to 4.3941% from 4.404% late on Thursday.
The 2-year note yield, which typically moves in step with interest rate expectations, was last down 5.4 basis points to 4.4535%, from 4.507% late on Thursday.
Global oil prices fell, as investors weighed weaker consumer sentiment against optimism about U.S. rate cuts. U.S. crude settled down 0.5%, or 41 cents at $82.21 a barrel and Brent ended at $85.03 per barrel, down 0.4% or 37 cents.
Gold prices were roughly flat after a strong rally in the previous session, although bullion was still on track for its third straight weekly rise on bets around U.S. rate cuts.
Spot gold lost 0.14% to $2,411.31 an ounce.[GOL/]