LONDON (Reuters) – European shares were heading for their biggest weekly fall of the year on Friday, as a second week of gains for oil prices and a resurgent euro put the brakes on a two-month bonanza for the region’s equity markets.

Trading on the day was choppy, with oil dropping back after Thursday’s spike and the world’s regional share and currency markets mixed as investors assessed the wider impact of tensions in the Middle East.

U.S. stocks looked set to open flat or modestly lower, according to index futures ESc1.

Asian shares dropped overnight but the pan-European FTSEurofirst .FTEU3 rose 0.6 percent on the day as a 0.3 percent fall for Britain’s FTSE .FTSE was offset by 0.6 percent gains on Germany’s DAX .GDAXI and France’s CAC 40. .FCHI

They rose as a rebound by the recently subdued dollar pushed the euro back down, but for the week the FTSEurofirst 300 was down 1.7 percent, its worst run since mid-December, a dent in its 18 percent gains for the past three months.

Gavin Friend, a strategist at National Australia Bank in London, said currency dynamics were behind European shares’ loss for the week.

“The dollar is back stronger again today, but we seem to have gone through the period where the dollar was rampaging through markets. That brought all kinds of (U.S.) policymakers out of the woodwork and now we are in more of a two-way market.”

Crude oil prices were lower due to the dollar’s bounce and as investors reassessed the potential impact of the escalating conflict in Yemen, where Saudi Arabia and allies carried out air strikes on Iranian-backed Houthi rebels on Thursday and Friday.

U.S. crude CLc1 was down 1.8 percent at $ 50.52 a barrel after jumping 4.5 percent, while Brent LCOc1 was down a similar amount at $ 58.11.

The Saudi-led operation has not affected the oil facilities of major Gulf producers, but the fear is the conflict could spread and further unsettle the Middle East and disrupt oil shipments.

Goldman Sachs, however, said it expected the Yemen military action, but also a potential nuclear deal with Iran that could lead to a loosening of sanctions, to have little near-term impact on oil supply.


Much of the run up in European markets has come as the European Central Bank has launched a 1 trillion euro bond buying campaign. But with the programme already showing signs of lifting the euro zone economy, talk is starting to emerge in markets about the bank slowing its buying next year.

Italian IT10YT=TWEB, Spanish ES10YT=TWEB and Portuguese PT10YT=TWEB bonds, which have been some of the biggest beneficiaries of the ECB’s stimulus, were heading for a second week of rises in their yields despite mixed fortunes on Friday.

The dollar’s recovery pushed it back up to 119.32 yen JPY= having hit a five-week trough of 118.33 on Thursday, while the euro’s 0.3 percent drop on the day to $ 1.0850 was putting it flat for the week.

“It’s pretty clear that the market psychology is still to buy the dollar on dips, and hence we had this huge reversal in the dollar,” said Alvin Tan, a currency strategist at Societe Generale in London.

While keeping a close eye on developments in the Arabian Peninsula, the markets are also waiting for a speech by Federal Reserve Chair Janet Yellen.

Yellen is scheduled to speak in San Francisco on monetary policy and her comments will be closely analysed after the Fed’s dovish outlook last week bruised the dollar.

Excluding the effect of last year’s sales tax increase, data released on Friday showed Japan’s core consumer price index was flat in February compared with a year ago.

It was the first time it has not risen in nearly two years, and will be disappointing for a government that is seeking to end a long phase of deflation. The yen showed little reaction. ECONJP

Among the Asian equities, indexes in Hong Kong, South Korea, Malaysia and Thailand suffered light losses.

Japan’s Nikkei .N225 handed back earlier gains and slid 1 percent as hedge funds took profits on recent gains before the end of the quarter.

(Additional reporting by Shinichi Saoshiro in Tokyo and Jemima Kelly and Nigel Stephenson in London; Editing by Toby Chopra)