April 11 (Reuters) - The dollar index trimmed its losses on Friday, rebounding from a three-year low as investors downplayed China's increase in tariffs on U.S. imports to 125%. A 2% increase in oil and gains in bank shares after beating first-quarter earnings expectations contributed to equity index gains. Treasury yields firmed following Fed remarks on inflation and liquidity and data showing that U.S. consumer inflation expectations have risen to their highest point since 1981. New York Fed President John Williams said the Trump administration policies will accelerate inflation this year and that it's critical for the U.S. central bank to prevent longer-run expectations of price pressures from becoming unmoored. He also rejected the idea the economy was falling into a high inflation, low growth environment. Minneapolis Fed President Neel Kashkari said the Fed should intervene in markets only in a true emergency, adding that the dollar going down lends some "more credibility to the story of investor preferences shifting." President Susan Collins said the U.S. central bank is "absolutely" prepared to deploy its tools to address financial market functioning if the need arises, tough “markets are continuing to function well, the FT reported. The White House said more than 15 trade deals were already on the table and that the Treasury Secretary is keeping tabs on the bond market. EUR/USD surged over 1.0% to a three-year high of 1.1474 before trimming gains, taking out option barriers in the process. The common currency also rose against the Swiss franc and other European counterparts, a sign of positions being consolidated. The sharp reversal lower on the session suggested a near-term, overbought top may be in place ahead of the 1.15 psychological level. ECB President Christine Lagarde said the European Central Bank is ready to deploy its instruments to maintain financial stability. On Monday, European Trade Commissioner Maros Sefcovic will hold talks with U.S. officials in Washington. GBP/USD tested its upper Bolligner before trimming gains. The pair needs to climb above the 1.3207 April 3 high to see upward momentum build while a drop back below its 200-day moving average at 1.2815 is bearish. The FTSE ended higher while gilt yields fell after data showing Britain's economy returned to growth in February. USD/JPY recovered most of its decline to a six-month low of 142.05 as risk sentiment improved. Risk reversals remain very bearish on concerns that USD/JPY could fall below the 2024 low of 139.58. A move back above its April 4 low of 144.55 and lower 21-day Bollinger of 144.60 would help to slow downward momentum. Kyodo news reported that U.S. President Donald Trump expressed strong interest in Japan's currency policy as trade negotiators get set to meet on April 17.
Aussie and kiwi outperfomed due to rising commodity prices and a one-week high in the offshore yuan.
Treasury yields were up 2 to 10 basis points as the curve flattened. The 2s-10s curve was down about 1 basis point to +53.9bp.
The S&P 500 rose 1.8% with materials and energy sectors leading the advance.
Oil jumped 2.5% after U.S. Energy Secretary Chris Wright said on Friday that the United States could stop Iran's oil exports as part of President Donald Trump's plan to pressure Tehran over its nuclear programme.
Gold rose 1.8%, reaching a new record on haven buying, while the weaker dollar lifted copper by 4.3%.
Heading toward the close: EUR/USD +1.12%, USD/JPY +0.50%, GBP/USD +0.79%, AUD/USD +1.16%, DXY +0.81%, EUR/JPY +0.59%, GBP/JPY +0.25%, AUD/JPY +0.65%.(Editing by Burton Frierson Reporting by Robert Fullem)
