By Marc Jones
LONDON (Reuters) - The dollar took its biggest tumble in almost two months on Thursday and stocks fell from nine-month highs as cautious sounds from the Fed left focus firmly on Japan's next round of money-printing measures.
The greenback was down 0.5 percent against six other major currencies and Wall Street was heading for weaker start after the U.S. Federal Reserve ended its meeting on Wednesday with little suggestion it was in a rush to raise U.S. interest rates.
It had seen traders cut their bets on a September Fed move to just 17 percent. Benchmark 10-year U.S. government bond yields fell back to 1.5 percent with the move eventually following in European bonds after a choppy morning.
The yen notched its fourth rise in six days as news that Tokyo had unveiled a surprisingly large 28 trillion yen ($265 billion) stimulus package left traders wondering how aggressive the Bank of Japan would be when it meets on Friday.
Speculation has been intense for weeks, causing whipsaw moves in currencies as analysts forecast even deeper negative Japanese rates and yet more bond purchase-driven money-printing.
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Costs to insure against dollar/yen swings hit their highest in 8 years and Societe Generale FX strategist Alvin Tan said the BOJ meeting was now a "huge event risk" for markets.
"The Fed did kind of acknowledge the better economic data but the tone was definitely on the dovish side and the market has reacted as such," he said.
"There is an expectation that there will be action from the BOJ tomorrow," he added. "The pain trade would therefore be if it did nothing, you would see a significant move in the yen."
MSCI's 46-country All World stocks index nudged to nine month highs in Asia but drifted back again in Europe as shares there fell 0.5 percent, having spent most of the early part of the day searching for direction.
There were modest rises for Germany's DAX and France's CAC40 but they were offset by some sharp individual falls, including a 3.5 percent drop by oil major Shell after it posted a 70 percent slump in its quarterly profits.
STRESSFUL TIMES
U.S. traders were already digesting the latest weekly jobless claims data ahead of the start of Wall Street trading.
Banking stocks were also in focus ahead of European bank stress test results on Friday that are expected to lay out the scale of the bad loan problems in Italy, as well as strains on big German banks like Deutsche Bank.
Shares in Italy's third-largest lender Monte dei Paschi di Siena, which is saddled with a mountain of bad loans and accumulated losses, rose as much as than 4 percent after news it was aiming for a 5 billion euro capital hike and that Italy's Atlante fund might be able to buy substantial amounts of bad loans.
"In my opinion, we don't have a systemic problem in the Italian banking system," said JP Morgan Asset Management's Maria Paola Toschi. "The stress tests should give more visibility of which banks need to be restructured and which are more solid."
JP Morgan's investment bank arm is, along with Mediobanca, in charge of drumming up interest in Monte dei Paschi's capital hike.
Europe's bond markets were moving about too, with investors caught between the week's three big events.
With the stress tests looming, Italian government bond yields rose at first only to edge down again as a new bond was sold at record low yields.
"It's probably not a coincidence that it's on the day before the stress test results," ING senior rates strategist Martin van Vliet said.
Italian benchmark bonds have also underperformed their Spanish peripheral peers since Britain's June 23 vote to leave the European Union. The extra yield investors demand to hold Italy's 10-year debt over Spain's hit its highest since February 2015 earlier this week at 13.8 basis points.
The broader market uncertainty and lack of interest rate rise expectations left spot gold hovering near the two-week high of $1,342.18 an ounce touched overnight.
The euro, which gained 0.7 percent overnight, edged up to a nine-day high of $1.1088 while the Australian dollar, which has been closely tracking the yen recently, was up 0.4 percent at $0.7524.
Oil markets steadied after a turbulent few days that have pushed crude prices back to three-month lows. U.S. crude rose 0.2 percent to $42.02 a barrel after dropping sharply on news U.S. crude and gasoline stocks had surged.
Brent crude was shade lower at $43.39 a barrel.
"Lower oil prices continue to be a significant challenge across the business, particularly in the upstream (operations)," Shell's Chief Executive Ben van Beurden said after it reported its slump in profits.
(Addition reporting by Nigel Stephenson; Editing by Tom Heneghan)