Fed pullback concern boosts dollar, pressures stocks: global markets

New York (Dec 14)   The US dollar touched a five-year high against the yen and rose against the euro on Friday, while global equity indexes slipped on growing concerns the US Federal Reserve could surprise investors by scaling back its stimulus as early as next week.

Stronger-than-expected US data and a budget deal in Washington have brightened the outlook for the US economy, but are causing jitters in equity markets that have benefited from ample central bank liquidity.

The current Thomson Reuters consensus among economists is still for the Fed to begin withdrawing stimulus in March 2014.

"There's a lot of uncertainty going into the meeting and some are talking about a small taper next week, although that is not our view.

We still think the Fed will wait until January to make any announcement," said Greg Moore, currency strategist, at TD Securities in Toronto.

Concerns about a possible Fed surprise next week resulted in US-based funds pulling $6.51 billion out of stock mutual funds in the past week, the biggest outflow this year, before the Dec. 17-18 Fed meeting, according to Thomson Reuters Lipper data released on Thursday.

The MSCI world equity index was down 0.1 percent at 391.84 points, taking its losses for the past two weeks to 2.5 percent and putting it on track for its biggest fortnightly loss since June.

The prospect of Fed tapering boosted the US dollar, which gained 0.1 percent to 80.250 against a basket of currencies. The euro fell 0.2 percent to $1.3726.

The dollar slipped against the yen after earlier hitting five-year highs. It last traded at 103.25 yen, down 0.1 percent on the day.

US stocks were modestly higher, bouncing back after a three-day drop, after data showing a lack of inflation revived hopes the Federal Reserve will not reduce its bond purchase stimulus program next week.

The Dow Jones industrial average gained 19.72 points, or 0.13 percent, to 15,759.15.

The Standard & Poor's 500 Index rose 0.44 points, or 0.02 percent, to 1,775.94. The Nasdaq Composite Index added 2.07 points, or 0.05 percent, to 4,000.47.

The pan-European FTSEurofirst 300 touched fresh two-month lows and ended down 0.1 percent at 1243.47 points.

Emerging markets were also hit, with sell-offs in currencies including the Indonesian rupiah and the Indian rupee on concern that tighter Fed policy could sap flows into emerging markets.

"We have taken down our exposure to some of the smaller markets, as the tapering can be a hassle for some emerging-market currencies," said Hans Peterson, the global head of investment strategy at SEB Private Banking.

Given the scale of the market moves in anticipation of the Fed meeting, some analysts said a rebound in equities was possible once the meeting is over, whether the Fed acts or not.

"I think either way we can get a relief rally post the Fed, because either we will get a very small taper and really strong guidance on rates, or we will get no taper," said Alan Higgins, chief investment officer, UK, at Coutts.

Expectations for Fed tapering and prospects for oil ports in eastern Libya to resume exports pressured oil prices.

January Brent was down 44 cents at $108.23 a barrel, following a fall of more than $1 on Thursday.

Brent has slipped 3 percent so far this week, the steepest weekly loss since the end of September. US crude futures for January were down $1.07 at $96.43 a barrel, after rising around $6 in the past two weeks.

Gold rose 1 percent to $1,236 an ounce after a two-day fall, but sentiment remained fragile. Benchmark US 10-year Treasury notes last traded up 3/32 in price to yield 2.8646 percent.