GLOBAL MARKETS-Fed inflation warning buoys dlr; Euro stocks up

                                
 By Natsuko Waki
                                
 LONDON, June 5 (Reuters) - The dollar extended gains while
euro zone government bonds slipped on Thursday after the Federal
Reserve chief fired a warning shot on inflation, while firmer
banking stocks buoyed European stocks.
                                
 Fed chairman Ben Bernanke said on Wednesday rising long-term
inflation expectations were a "significant concern" for
policymakers, a day after he made an unusual warning about the
inflationary threat from a weak U.S. currency.
                                
 "The Fed is less indifferent to the exchange rate now, and
that is supportive for the dollar," said Adam Cole, head of
currency strategy at RBC Capital Markets.
                                
 Investors are increasingly worried about a damaging mix of
rising prices and slowing growth as the developed economies face
the chilling effects from the 10-month-old credit crisis. The
threat of rising inflation means investors now expect the Fed
would raise interest rates by the year end.
                                
 The dollar rose 0.6 percent to 105.93 yen <JPY=> while it
rose 0.1 percent versus the euro. It hit a one-month high <.DXY>
against a basket of six major currencies.
                                
 The June Bund future <FGBLM8> were down 27 ticks, ahead of
interest rate decisions from the European Central Bank and the
Bank of England.
                                
 Inflation is set to be the main focus for the two central
banks which are expected to hold their interest rates steady
later.
                                
 "The persistently hawkish message from the ECB is likely to
remain in place until there are clear signs of an easing
inflation pressure and that could still be some months away.
Until then the prospects of lower interest rates is receding
quickly," Calyon said in a note to clients.
                                
 Sterling <=GBP> fell broadly after a UK house price survey
by Halifax showed a larger-than-expected fall in May.
                                
 "It continues to point to a dilemma for the Bank of England,
with indications about problems for the economy, while it can't
do anything about it because of rising inflation," Cole said.
                                
 The FTSEurofirst 300 index <.FTEU3> rose 0.1 percent on the
day while MSCI main world equity index <.MIWD00000PUS> were down
0.15 percent, dragged lower by falls in Asia.
                                
 Banking stocks <.SX7P> turned higher in Europe, shrugging
off comments from Moody's Investor Service which said on
Wednesday it was likely to cut the top credit ratings of two
U.S. bond insurers on concerns about mortgage-related losses and
limited business prospects.
                                
 Emerging sovereign spreads <11EMJ> tightened 3 basis points
while emerging stocks <.MSCIEF> were down 0.1 percent.
                                
 U.S. light crude <CLc1> rose 0.1 percent to $122.40 a barrel
while gold <XAU=> ticked lower to $875.10 an ounce.
                                
 (Additional reporting by Simon Falush)