GLOBAL MARKETS-Stocks slip as ECB hikes rates after hawkish Fed pause

World stocks slipped from 18-month peaks and the dollar pushed higher on Thursday as traders watched the European Central Bank (ECB) push through an eighth straight interest rate hike and signal that more could be on the way.

The ECB's move lifted interest rates to a two-decade high of 3.5%. The market mood had already been groggy after the U.S. Federal Reserve delivered an unexpectedly strong signal that Wednesday's pause in its rapid hiking cycle might not last long. Dealers reacted by continued to push both U.S. and German 2-year bond yields, which drive global borrowing costs, to their highest levels since March, leaving them at 4.8% and almost 3.2% respectively.

Paris and Frankfurt blue-chips were down by around as much as 0.7%, while a lifeless euro and overnight tumble from the yen helped the dollar clamber off a 4-week low against the other major world currencies. ECB interest rate will be brought to "sufficiently restrictive" levels the bank reiterated.

"I still think that we are close to the peak of inflation and so it depends what this peak looks like," Close Brothers Asset Management Chief Investment Officer Robert Alster said. "Will it be a plateau?" he said, adding that if it is, "even if the ECB then hikes one more time after this, we could then be in a holding period for quite a while."

ECB President Christine Lagarde's press conference due next will focus on sticky core inflation and what kind of level rates could max out at before that get too restrictive. Wednesday's Fed pause had been its first in 10 consecutive meetings. It left its benchmark funds rate window at 5-5.25% still well above the ECB's new level.

Hawkishness wasn't the day's full story though. Overnight, China's central bank cut another of its key policy rates amid fresh signs its giant economy is spluttering again. That saw the yuan hit a six-month low of 7.18 to the dollar before a late bounce, while hopes of more stimulus saw stocks in Hong Kong and Shanghai close up more than 1.5% and 2% respectively.

With the Bank of Japan (BoJ) looking likely to stick with its ultra-easy monetary policy on Friday, the yen also fell to six-month low, with a 1% drop to 141.50 per dollar. "Dollar-yen is at year highs and markets are increasingly beginning to talk about whether a further rise could trigger the BoJ to verbally and also effectually intervene in the FX market," Danske Bank's head of FX research Kristoffer Kjær Lomholt said.

STEADFAST MSCI's broadest index of Asia-Pacific shares outside Japan ended up around 0.7% at a two-month high, while Japan's tearaway Nikkei held at a three-decade peak.

S&P 500 futures were flat, though, and MSCI's 47-country global index was fractionally lower following five straight days of gains. "The Fed is being pretty steadfast," said Bart Wakabayashi, branch manager at State Street in Tokyo, which has brought back the contrast with stimulatory Japan to the fore.

"They point at inflation, the labour market and wages and say look we want (inflation) at 2% and whether it's 6% or 5% or 5.5% it's still not at 2% - they're going to do what they need to do to get that down to 2%." Fed funds futures pricing did not budge much in the wake of the meeting, but expectations for a hike next month firmed a little and traders pushed any hopes for cuts deeper into 2024.

Elsewhere, those hopes and strong Australian jobs data leant support to the Aussie dollar, which was firm at $0.6822, while the New Zealand dollar was on the ropes after data showed the economy shrank into recession this year. Brent oil was a steady at $73.29 a barrel while gold , which pays no income, dipped to a two-week low of $1,934 an ounce.