London: World stock markets fell Thursday while the dollar strengthened to a three-month high against the euro after the US Federal Reserve signalled it would start undoing some of its emergency supports next year as the economic recovery gathers pace.
In Europe, the FTSE 100 index of leading British shares was down 64.53 points, or 1.2%, at 5,255.73 while Germany’s DAX fell 44.15 points, or 0.8%, to 5,829.28.
The CAC-40 in France was 30.13 points, or 0.7%, lower at 3,845.69.
US stocks fell at the opening bell too after an unexpected rise in new weekly U.S. jobless claims suggested continued labor market weakness. The Dow Jones industrial average was down 45.72 points, or 0.4%, at 10,395.40 soon after the open while the broader Standard & Poor’s 500 index fell 4.92 points, or 0.4%, to 1,104.26.
Sale factor: The main catalyst for the selling was the release of the minutes of the Fed’s rate-setting meeting. Karen Bleier / AFP
The main catalyst for the selling was Wednesday’s release of the minutes to the last rate-setting meeting of the Fed.
Though the Fed reiterated its pledge to keep interest rates near zero, it noted improvements in the economy and detailed the beginnings of a plan to dismantling a number of its extraordinary lending measures in 2010.
The news stoked speculation the central bank might increase interest rates sooner than expected, leading many investors to shift out of stocks.
“The Fed’s upgraded assessment of market conditions is indicative that it’s nudging closer to what must be its ultimate goal of withdrawing financial support in early 2010,” said Philip Gillett, sales trader at IG Index.
America’s ultra-low borrowing costs have contributed to a nine-month bull run in stocks and the sharp fall in the dollar this year, but with investors eyeing more expensive borrowing costs sooner than anticipated, the US currency has recovered its poise.
By early afternoon London time, the euro was down 1.2% at $1.4368, having fallen to $1.4330, its lowest level since early 7 September. Meanwhile, the dollar was 0.3% higher at 90 yen.
While the dollar has been buoyed by higher bond yields, the euro has continued to come under pressure from Standard & Poor’s downgrade of Greece’s credit rating, arguing that the government’s plan was unlikely to lead to a “sustainable” reduction in the country’s debts.
“There is the risk of a contagion effect given the poor fiscal position in some European countries like Italy, Belgium and Ireland,” said Neil Mackinnon, global strategist at VTB Capital. “This is all negative for the euro at the moment.”
Since this is the last full trading week of 2009, traders know that investors may use the opportunity to sell stocks and lock in gains made over the last nine months.
Earlier in Asia, the Nikkei 225 stock average shed 13.61 points, or 0.1%, to 10,163.80, and Hong Kong’s Hang Seng slid 264.11 points, or 1.2%, to 21,347.63.