Euro zone government bonds fell on Friday as investors focused on upcoming European Central Bank rate hike plans after the U.S. Federal Reserve hinted interest rates there may have peaked, which pushed up shares and forced the dollar down.

As widely expected, the Federal Reserve raised U.S. interest rates a 17th straight time on Thursday but fired up financial markets by toning down its warnings about the possible need for further increases.

Some analysts covering the markets, however, felt the focus on the Fed was a pantomime, obscuring the real drivers behind the market falls since May 11.

The key factor behind the market fall was carry trade speculation centering around the yen which peaked in April, said Mark Tinker, a global equity strategist at brokers Execution in London.

The obsession with the Fed was all smoke and mirrors. However, this presents an opportunity for end-of-quarter window dressing which will see some investors selling stock into the relief rally. But it does seem to have brought a volatile second quarter to a positive close.

However, focus soon shifted from the Fed to the ECB as euro zone government bonds fell on concerns over the prospects of an accelerated campaign of rate hikes overshadowed the Fed's more dovish statement.

Bund and interest rate futures initially rose on the back of overnight gains in Treasuries after markets interpreted the Fed's latest policy statement as signalling a pause in or end to U.S. rate hikes.

But prices turned negative, with dealers citing a change in forecast for ECB rates by securities house JP Morgan, which said in a research note it expected a hike at next week's meeting and saw rates reaching 4 percent early next year.

That would rattle the market even if the reaction of bonds is disproportionate to the reality, said a trader in London.

At 1010 GMT, the September Bund future was down 29 ticks on the day at 115.10.

Similarly, prices on benchmark 10-year euro zone bonds were also lower, sending yields up 4 basis points to 4.091 percent.

STOCKS FAVOURED

European stock markets rose sharply, tracking gains in U.S. and Asian shares with the pan-European FTSEurofirst 300 index 0.9 percent stronger at 1,307 points, its highest since June 5 and adding to Thursday's 1.8 percent rally.

I think markets were obviously worried that (the Fed) was going to be more aggressive tightening and that doesn't seem to be what's indicated at the moment, said Jeff Currington, European equities portfolio manager at Credit Suisse.

Euro zone inflation stuck at an annual 2.5 percent in June, beating forecasts for a fall to 2.4 percent. The European Commission's business climate indicator jumped to 1.41 this month, its highest in nearly six years.

This follows a run of strong data from the 12-nation block in recent days. ECB policymakers have also stepped up their rhetoric this week, warning of inflationary pressures and boosting the euro.

We had good figures out of the euro zone and that was pretty positive for the euro and now we have to wait and see what will happen next week at the ECB, said Antje Praefcke, currency strategist at Commerzbank Corporates & Markets in Frankurt.

The dollar lost ground globally since the (Fed) statement was less hawkish than expected by the market, she added.

The euro was up 0.36 percent against the dollar at $1.2712, just off a three-week high of $1.2744 hit earlier in the session, while the dollar fell a similar amount against the yen to trade at 114.65.

OIL UP

Oil climbed towards $74 on Friday on a positive outlook for economic growth and fuel demand in top consumer the United States. U.S. crude was up 19 cents at $73.71 a barrel adding to a $1.33 rally on Thursday to take gains for the week to 4 percent.

Copper prices jumped 4 percent to a three-week high while gold prices rose about 2 percent to $600 an ounce as the dollar extended losses across the board on the U.S. rate outlook.

Credit Suisse European union Inflation