San Francisco Frontiers - Euro gets boost as Russian gas returns, ECB supersizes rate hike

Sitting at just under $1.02 before the ECB announced its first rate hike in over a decade, the euro shot up as high as $1.0279.

It later fell back as ECB chief Christine Lagarde spoke to journalists.

While ECB policymakers had flagged a hike in rates at the meeting on Thursday to tame soaring inflation, analysts were divided about whether the traditionally cautious institution would proceed with a quarter-point or half-point move.

City Index analyst Fawad Razaqzada said that the euro's recent slump -- it briefly fell under dollar parity last week -- meant that the eurozone is now importing more inflation, which favoured a bigger hike.

The jump in eurozone inflation to an annual rate of 8.6 percent in June also increased pressure on the ECB, as did the fact other central banks have moved more aggressively than markets had expected.

"The ECB had to surprise, otherwise the euro would have plunged -– and they couldn't risk that," said Razaqzada.

The ECB also introduced a new tool to counter spikes in the borrowing costs of some eurozone countries.

With the resignation of Prime Minister Mario Draghi increasing the political risk in Italy and sending Italian government bond yields climbing, the ECB may need to use its new tool.

The difference between Italian government bond yields and those of Germany, the eurozone benchmark, widened Thursday to the highest point since the 2020.

Milan's FTSE MIB index fell three percent before paring some of those losses.

Paris stocks dipped 0.2 percent and Frankfurt's DAX slid 1.0 percent despite the resumption of Russian gas flows.

Russia on Thursday restored critical gas supplies to Europe through Germany via the Nord Stream pipeline after 10 days of maintenance.

European officials had worried that Russia would find a pretext to keep the gas shut off.

Uncertainty still lingers over whether the Kremlin might trigger an energy crisis on the continent this winter.

ECB chief Christine Lagarde acknowledged that the fallout from Russia's war in Ukraine and soaring inflation have darkened the eurozone's economic outlook.

On the commodities markets, oil prices extended their losses -- with WTI below $100 -- after data showed US stockpiles rose more than expected last week as Americans opted not to pay for expensive petrol.

The figures come despite being at the height of the high-demand summer driving season.

Wall Street stocks opened mostly lower, with the Dow slipping 0.5 percent.

- Key figures at around 1330 GMT -

London - FTSE 100: DOWN 0.6 percent at 7,219.28 points

Frankfurt - DAX: DOWN 1.0 percent at 13,145.65

Paris - CAC 40: DOWN 0.2 percent at 6,172.42

EURO STOXX 50: DOWN 0.5 percent at 3,568.81

Milan - FTSE MIB: DOWN 1.7 percent at 20,980.72

New York - Dow: DOWN 0.5 percent at 31,712.19

Tokyo - Nikkei 225: UP 0.4 percent at 27,803.00 (close)

Hong Kong - Hang Seng Index: DOWN 1.51 percent at 20,574.63 (close)

Shanghai - Composite: DOWN 1.0 percent at 3,272.00 (close)

Euro/dollar: UNCHANGED from $1.0175 on Wednesday

Pound/dollar: DOWN at $1.1898 from $1.1975

Euro/pound: UP at 85.52 pence from 84.96 pence

Dollar/yen: UP at 138.50 yen from 138.26 yen

West Texas Intermediate: DOWN 4.1 percent at $95.82 per barrel

Brent North Sea crude: DOWN 3.6 percent at $103.07 per barrel

H.King--SFF