* Dollar index hits seven-week high
* 2-year Treasury yields hit highest since December
* European stock markets climb, FTSE hits record high
* French/German yield gap widens as Fillon stays in race
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Jemima Kelly
LONDON, March 1 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.
Analysts said the decision by Fillon to stay in the running
would strengthen the market favourite, 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.
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.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Additional reporting by Helen Reid, Jamie McGeever and Dhara
Ranasinghe in London, and Nichola Saminather in Singapore;
Editing by Mark Trevelyan)