By Marc Jones
LONDON (Reuters) - The high-flying dollar steadied on Friday as markets waited for steers on U.S. monetary policy, while escalating tensions over Ukraine halted a strong run-up by European stocks.
Fears the conflict would worsen before next week's meeting between Vladimir Putin and Ukraine President Petro Poroshenko pushed up safe-haven assets, but was not enough to distract markets from the main focus of when cheap and easy credit was likely to come to an end.
U.S. Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi are both speaking later at the annual gathering of central bankers in Jackson Hole, Wyoming.
Talk will focus on labour markets and economic prospects but traders will be listening for any clues about the timing of U.S. interest rate rises and how the ECB plans to tackle the euro zone's growth and stubbornly-low inflation problems.
"Everyone expects Janet Yellen to make another speech that the labour market isn't as rosy as the headline employment numbers suggest," Aberdeen Asset Management portfolio manager Luke Bartholomew said.
"We are all set up for her to be dovish, so the surprise would be if she wasn't."
With that uncertainty in mind, Wall Street was expected to see a subdued restart
European shares <.FTEU3> were heading for their biggest weekly gain since February but dipped after a Russian convoy of aid trucks entered eastern Ukraine without Kiev's permission.
News the Red Cross was also not moving into Ukraine with the Russian trucks as planned triggered stock selling in London <.FTSE>, Frankfurt <.GDAXI> and Paris <.FCHI>.
Shares in Moscow tumbled over 2 percent <.IRTS> to bring this week's rally to an abrupt halt, and the rouble
"The Ukraine headlines saw both the Swiss franc and the yen rise, but gains have been relatively muted," said Alvin Tan, currency strategist at Societe Generale. "The big mover, I guess, will be Yellen's speech later in the day."
Asian share markets had hitched a ride overnight on another record close for Wall Street to end at a six-and-half-year high.
JANET AT JACKSON
Yellen makes her first trip to Jackson Hole as Fed chair after U.S. data on Thursday showed home resales rose to a 10-month high in July, unemployment claims fell and a gauge of future economic activity grew solidly.
Kansas City Fed President Esther George said the time had come for higher U.S. rates, though less hawkish San Francisco Fed President John Williams suggested the bank should wait until next summer.
Yields on rate hike-sensitive 2-year U.S. government bonds have risen the most since March this week. In contrast, worries about the euro zone slipping towards deflation and near-zero growth pinned German 10-year government bond yields firmly below 1 percent on Friday. [GVD/EUR]
ECB President Mario Draghi is under pressure to use his last remaining tool - printing money to buy huge amounts of bonds - to tackle near-zero inflation but he is not expected to show any renewed urgency in that regard when he speaks later.
Market measures of euro zone inflation expectations have been nose-diving in recent weeks following a run of poor data. They now even predict the bloc will be in a worse position than deflation-prone Japan in 30 years' time.
"The odds of QE in the near term are relatively low," Pimco's European strategist and portfolio manager Myles Bradshaw said. "The market is thinking more about what will happen in 2015."
EMERGING STRENGTH
As MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> ended the week within a few points of a 6-1/2-year, the main emerging market index <.MSCIEF> hit a three-year high.
The index tumbled last May and in January when U.S. rate hike talk was also top of the agenda. But this time stocks in China <.CSI300> have risen for the last six weeks and even Russian stocks <.IRTS> remained on course for a second week of gains.
In commodities trading, spot gold
Copper, finely tuned to China's fortunes, was eyeing a seven-week high while U.S. crude
The sophistication, wealth and military might of Islamic State represent a major threat to the United States that may surpass that once posed by al Qaeda, U.S. military leaders said on Thursday. So far, however, the fighting has had little impact on oil supply.
(Additional reporting by Anirban Nag in London; Editing by Louise Ireland and John Stonestreet)
