LONDON, Aug 31 (Reuters) - Borrowing costs in the euro area and Japan hit their highest levels in years on Monday, as a 3% jump in oil prices on the U.S. and Iran resuming military attacks added to angst about inflation that could keep central banks in rate-hike mode.
World stocks were in a cautious mood on the last trading day of August, while gold was headed for its best month since January and the dollar slipped.
A jump in Brent crude to just over $92 a barrel followed a U.S. attack on an Iranian island in the Strait of Hormuz. Tehran said it had retaliated.
That kept alive the risk of further interest rate increases from major central banks after Federal Reserve Chairman Kevin Warsh's hawkish speech at Jackson Hole on Friday boosted bets on a September Fed rate rise.
"We have brought forward the start of the Fed’s tightening cycle and now expect a September interest rate increase," said Kristina Clifton, a senior economist at Commonwealth Bank of Australia.
Japan's 2-year government bond yield rose to a 31-year high , while German and French 2-year bond yields climbed to their highest levels since 2024 .
As the European session gathered momentum, longer-dated yields in the euro area hit their highest in over 15 years, continuing the trend of recent weeks.
The European Central Bank is widely expected to hike rates when it meets on September 9-10.
Markets have lifted the probability of a September Fed rate increase to around 60%. It was just under 50% last week.
Michael Feroli, chief U.S. economist at JPMorgan, said: "We continue to expect that a hike won't come until December, though agree that the September meeting is live ...
"Moreover, regardless of the exact timing of hikes, Warsh's speech suggested a chair more willing to translate his concern about inflation into a policy tightening."
Barclays now expects the Fed to raise rates by 25 basis points in both September and December.
Europe's STOXX 600 index (.STOXX), dipped 0.2%, with trading volumes reduced by a UK public holiday. U.S. stock futures nudged lower as the European session wore on , .
In Asia, Japan's Nikkei (.N225), slipped 0.1%, while MSCI's world stock index was marginally lower (.MIWD00000PUS).
Chinese blue chips (.CSI300), recovered from early losses, although property developers remained under pressure after Beijing announced regulatory changes. The official manufacturing purchasing managers' index rose to 49.8 in August from 49.2 in July, though services remained subdued.
RATE HIKE BETS
Friday's U.S. August payrolls report and consumer price data due on September 11 will be key to determining whether the Fed moves as early as next month.
Economists expect payrolls to increase by 58,000 after July's shock decline of 23,000, with unemployment holding at 4.1%. A significantly weaker outcome would likely be needed to materially reduce expectations of a September rate hike.
Inflation concerns are expected to prompt New Zealand's central bank to hike rates for a second straight meeting on Wednesday, while the Bank of Canada is expected to stay on hold amid concerns about the economic impact of a trade dispute with the United States.
Inflation and interest rates are also expected to dominate discussions when G20 finance ministers and central bankers meet in North Carolina on Monday and Tuesday.
In an interview with Reuters on Sunday, U.S. Treasury Secretary Scott Bessent said he planned to meet the head of the Bank of Japan amid speculation that it too could raise rates in September.
Analysts argue a series of hikes is needed to shore up the yen, which has again slid past 160 per dollar.
Bessent said the yen fall was "pretty well contained", suggesting the slide was not disorderly enough to trigger a repeat of joint Japan-U.S. intervention.
Dollar/yen was last trading at 159.74, down 0.14% on the day.
Japanese bonds followed Friday's selloff in Treasuries as 10-year yields again hit their highest since 1996.
Two-year Treasury yields held at 4.34%, after jumping almost 12 basis points on Friday. Yields on 30-year bonds were more contained at 5.20% , with investors taking some comfort from Warsh's emphasis on fighting inflation.
The euro was a shade firmer at $1.1596 , after weakening on Friday following Warsh's speech.
Euro zone inflation data this week is expected to cement market pricing for a September rate hike from the European Central Bank.
Elsewhere, gold was steady at around $4,451 an ounce <XAU=>. It has gained roughly 10% in August — set for its biggest monthly jump since January.
Reporting by Dhara Ranasinghe in London and Wayne Cole Sydney; Editing by Mark Potter and Kevin Liffey
