By Jemima Kelly
LONDON (Reuters) - European stocks, the dollar and bond yields climbed on Friday as investors speculated that the "Trumpflation trade" could be back in play, after the U.S. Senate approved a budget blueprint that paves the way for tax cuts.
The vote was seen as overcoming a crucial hurdle in President Donald Trump's plans for fiscal stimulus, and drove an increase in risk appetite across markets.
Wall Street was set to open higher as U.S. stock futures rose a quarter of a percent to all-time highs.
European shares rebounded from their worst day in two months, also helped by well-received earnings reports for Volvo and Ericsson and high German producer-price inflation numbers. Spanish stocks lagged, though, kept under pressure by worries over the Catalonia region. [.EU]
Earlier, Japan's Nikkei stock index logged its longest winning streak in more than half a century, while the dollar hit a more-than three-month high against the yen.
The Swiss franc - which along with the yen is often bought at times of investor uncertainty - dropped to its weakest against the euro since the Swiss National Bank removed its cap on the currency in January 2015.
The VIX "fear index", which briefly spiked close to 12 on Thursday, was back down below 10.
"The risk environment remains constructive, regardless of increased political uncertainty as related to Europe," wrote Credit Agricole analysts in a note to clients.
"The latest development is taken as a first step towards tax overhaul, and may be understood as an indication that there is willingness to accelerate efforts with respect to cuts."
The Republican-controlled Senate voted 51 to 49 for the budget measure, which paves the way for taxes to be reformed in the 2018 fiscal year without support from the Democrats, and which would add up to $1.5 trillion to the federal deficit over the next decade.
Bets that Trump's planned tax cuts, infrastructure spending and other pro-business measures would push up growth and inflation had been behind a "Trumpflation trade" that propelled the dollar to 14-year highs earlier this year.
But as doubts have grown about Trump's ability to push through reforms, that trade had been unwound and the dollar has slipped around 10 percent.
TRUMPFLATION TRADE "REVAMP"?
Thursday's Senate vote pushed 10-year U.S. Treasury yields to their highest in more than a week at 2.3650 percent.
While European bond yields were also pulled higher, the "transatlantic spread" between Treasury yields and their German equivalents stretched to 197 basis points, its widest since June.,..
The MSCI world equity index, which tracks shares in 47 countries, edged up towards record highs.
"We could see the revamp of the Trumpflation trade," said ING strategist Martin van Vliet, in Amsterdam. "There are still some steps to go but the bottom line is that the door to tax cuts has opened a bit further."
Earlier, Japan's Nikkei - which tends to show a negative correlation to the yen - logged its 14th straight session of gains, its longest such streak since 1961, after eking out a 0.04 percent rise for a robust weekly jump of 1.4 percent.
The yen was on track for its worst week in five against the dollar, with the greenback climbing as much as 0.8 percent on Friday to 113.42 yen, its strongest since mid-July, as investors readied for Sunday's Japanese national election.
Japanese Prime Minister Shinzo Abe's ruling bloc is expected to secure a roughly two-thirds majority.
"That kind of result would not have a big impact on the yen," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo. "But it is important to see whether or not the (ruling Liberal Democratic Party) considers it a victory for Abe or not."
The dollar index - which tracks it against a basket of six other major currencies - climbed 0.1 percent.
Shares in New Zealand notched their 14th straight rising session and fifth winning week to close at a record after the nationalist New Zealand First Party agreed to form a new government with the centre-left Labour Party following weeks of political negotiations, ending the centre-right National Party's decade in power.
But the New Zealand dollar wallowed at five month lows after a 1.7 percent fall on Thursday, its largest daily fall since June 2016, on concerns the new Labour coalition will take a tougher stance on immigration and foreign investment.
U.S. stocks were almost flat on Thursday, with Apple Inc falling 2.4 percent on signs of weak demand for the iPhone 8 that caused analysts and investors to question the company's staggered release strategy for its latest phones. [.N]
The dollar and U.S. bond yields had dipped on Thursday after a report that Trump was leaning toward Jerome Powell, who is seen as a dove, as the next chair of the Federal Reserve. Investors expect to hear who has been chosen in the coming days.
"Clarity about the Fed nomination would be positive for the dollar," said Yamamoto.
Oil prices fell and were set for a weekly loss as investors sought to book profits, despite tensions in the Middle East that have slashed supplies of crude. [O/R]
Brent crude, the international benchmark for oil prices, was down 35 cents at $56.88 a barrel.
(Additional reporting by Abhinav Ramnarayan, Saikat Chatterjee and Helen Reid in London, Lisa Twaronite and Hideyuki Sano in Tokyo and Ambar Warrick in Bengaluru; Editing by John Stonestreet and Andrew Heavens)
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