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The dollar jumped and short-term U.S. Treasury yields hit the highest since 2009 on Wednesday, as investors focused on growing chances of a U.S. interest rate hike this month, rather than on U.S. President Donald Trump's first speech to Congress.
Shares on Wall Street were expected to open higher, having hit record highs earlier this week, while gains in mining and bank stocks took Britain's blue-chip FTSE 100 index to an all-time high, buoyed by U.S. rate rise expectations and higher metals prices.
For most market players, Trump's keenly awaited speech late on Tuesday was overshadowed by comments from a handful of Federal Reserve policymakers who suggested they are concerned about waiting too long to raise interest rates in the face of pending economic stimulus from Washington.
New York Fed President William Dudley -- one of the most influential U.S. central bankers, and usually considered a dove -- said the case for tightening monetary policy had become "a lot more compelling", while San Francisco Fed President John Williams said he saw "no need to delay" raising rates.
Having priced in only around a 30 percent chance that the Fed would move this month before the Fed comments, investors are now pricing in around a 70 percent probability of a March hike, according to Reuters data. By June, an 86 percent chance of at least one hike has been priced in.
Two-year U.S. Treasury yields jumped to 1.308 percent, the highest since August 2009, while the gap between them and their German equivalents increased to its widest since 2000.
The dollar index, which measures the greenback against a basket of other major currencies, climbed 0.7 percent to its highest levels in seven weeks.
"The comments yesterday, particularly from Dudley, were a clear attempt to get the market discounting a March move," said Altana currency fund manager Ian Gunner, in London.
"It's not a done deal. There are plenty of data points between now and then. But...it seems they're going to push this March hike and get it on the table."
FILLON STAYS IN RACE
The premium investors demand for holding French bonds over German ones hit a one-month low after right-wing French presidential candidate Francois Fillon, whose campaign has been dogged by an investigation into alleged misuse of taxpayers' money, vowed to stay in the race.[GVD/EUR]
Analysts said the decision by Fillon to stay in the running would strengthen the market favorite, centrist candidate Emmanuel Macron, who polls show would easily beat far-right anti-EU leader Marine Le Pen in a final run-off.
The decision helped French stocks, already doing well after strong earnings reports, climb 1.7 percent to a 15-month high.
"The word from Fillon is that he soldiers on regardless, and that leaves Macron as the candidate most likely to win in terms of betting probabilities," said Societe Generale strategist Ciaran O'Hagan, in Paris.
Along with French and British stocks, Germany's DAX index also outperformed, with a 1.4 percent daily rise, while the pan-European STOXX 600 index gained 1.2 percent.
Banks were the top sectoral performers in Europe, with the pan-European banking index up 2.4 percent, set for its best gains in more than a month, on expectations of an imminent U.S. interest rate hike.
The global MSCI ACWI index, which has risen more than 10 percent since Trump's election in November, was flat, with gains in Europe offsetting earlier falls in Asia.
A raft of surveys pointing to stronger factory activity in China, Japan and other parts of Asia were largely overshadowed by Trump's speech.
Trump pledged to overhaul the immigration system, improve jobs and wages for Americans and deliver "massive" tax relief to the middle class and tax cuts for companies, but offered few clues on how they would be achieved.
In commodity markets, oil prices edged up as investors took heart from strict OPEC compliance with its pledge to cut output, though evidence of increasing U.S. production capped gains.[O/R]
The stronger dollar weighed on gold, which dropped 0.3 percent to 1,244.36 an ounce, extending Tuesday's decline.
The greenback's strength also inflicted modest losses on emerging stocks and currencies, though buoyant manufacturing data across the developing world allowed equity markets from India to Hungary to buck the weaker trend.