The dollar bobbed near a 3-1/2 month high and shares dipped for a second day on Wednesday as the recent jump in US borrowing costs and soft European data set markets up for what is expected to be an action-packed ECB meeting.
Safe-haven gold was stuck near a four-month low, while there were also signs of pressure building again on emerging markets that suffered badly from rising US rates earlier in the year.
Shares in Europe sagged 0.2 percent as a slowdown in the euro zone's economic recovery in the first quarter was confirmed on Wednesday and figures showed businesses were still having to cut their prices.
That left the euro limping along at $1.3617 EUR= against a resurgent dollar, driven up by a near 20 basis point rise in 10-year US Treasury yields since last week.
Futures prices also pointed to a subdued start for Wall Street, already near a record high, where attention will be on ADP private sector jobs data ahead of Friday's non-farm payrolls reading.
"What is interesting across the market is that US rates are higher," said John Hardy, head of FX strategy at Saxo Bank in Copenhagen. "We've seen the 10-year Treasury yield zip back above the 2.5 percent level and it has been quite a significant move these last few days."
"Emerging market currencies backing up again and it is also pushing dollar/yen higher so there is a very interesting sub-plot developing outside of the ECB."
Markets are wagering that the European Central Bank will respond to the euro zone's low inflation and sluggish growth concerns with an aggressive set of easing measures at its monthly policy meeting on Thursday.
As well as a new record low for euro zone interest rates, the list could include a negative deposit rate - effectively charging banks to park spare cash with the ECB overnight - plus a new round of cheap loans and even asset purchases.
"The world is expecting a little bit too much from the ECB on Thursday," said Neil Williams, chief economist at London fund manager Hermes. "(ECB head) Draghi has over-promised so the question is whether he now under-delivers."
TREASURY YIELDS
Economists are increasingly convinced that, in contrast to the euro zone, stronger US economic growth will allow the Federal Reserve to raise interest rates next year.
The diverging path has taken the gap between 2-year German market rates and their US equivalent to the widest in four years, though German yields steadied on Wednesday as Berlin avoided a third successive uncovered bond auction.
Benchmark US Treasury yields edged up to almost 2.6 percent as New York trading began. The dollar index, which tracks the greenback against a basket of six major rivals, lost a bit of momentum, but at 80.556 was within touching distance of its highest level since mid-February.
In Asia, Tokyo's Nikkei had hit a fresh two-month high on a weaker yen and pension reforms, though action elsewhere was muted as a 1 percent slide in Chinese shares compounded the US rate jitters.
There was a squeeze on emerging markets. The Indonesian rupiah led a wave of Asian currencies lower as it hit a near four-month trough. Further south, the Australian dollar leapt a quarter of a US cent after first quarter growth figures beat forecasts.
"The market still operates on the assumption that Fed tightening would be detrimental to emerging markets," said Jan Dehn at fund manager Ashmore. "It's a bit like the way five-year olds play football, where everyone just rushes in one direction after the ball."
NOT SO PRECIOUS GOLD
Ukraine and the tensions between the West and Russia were also back in the spotlight.
Visiting Poland, US President Barack Obama voiced his support for Ukraine's West-leaning president-elect Petro Poroshenko and in Berlin, German Chancellor Angela Merkel said she wouldn't hesitate to impose fresh sanctions on Russia if Ukraine was destabilized.
In commodities trading, gold was steady at $1,245.10 an ounce after plumbing a four-month low of $1,240.61, while oil added about 0.7 percent to $103.43 a barrel as industry data showed a bigger-than-expected fall in US crude stocks.
US jobs data on Friday could help determine whether the rise in Treasury yields will continue. The US non-farm payrolls report for May is expected to show that employers added 218,000 jobs, according to the median estimate of 105 economists polled by Reuters.
"I think (gold) prices will stabilize here for a short while around $1,245 before making another big jump either way," said a gold trader in Hong Kong. "People are mostly waiting for Friday's payrolls data before taking any big positions."
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