Fed hint of further action hits stocks as dollar slides to five-month euro low

Fed policy hint hits stocks as dollar slides

LONDON — World stock markets fell Wednesday while the dollar dropped to a near five-month low against the euro after the Federal Reserve indicated that it was ready to provide more assistance to the flagging U.S. economy.

In Europe, the FTSE 100 index of leading British shares was down 25.10 points, or 0.5 percent, at 5,551.09 while Germany’s DAX fell 49.68 points, or 0.8 percent, at 6,226.30. The CAC-40 in France was 39.44 points, or 1 percent, lower at 3,744.96.

Wall Street was also poised to open lower shortly — Dow futures were down 32 points, or 0.3 percent, at 10,662 while the broader Standard & Poor’s 500 futures fell 2.4 points, or 0.2 percent, to 1,132.30.

There were early gains in the aftermath of the Fed’s comments that it was “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with its mandate.”

But investors largely reacted negatively to the statement in light of its more pessimistic economic assessment, particularly that inflation indicators are below what is desirable for the economy.

“Investors appeared to be disappointed that the Fed’s monetary policy statement yesterday hadn’t included a more positive outlook and had failed to really take any steps to stimulate further demand,” said Yusuf Heusen, senior sales trader at IG Index.

The biggest casualty following the statement was the dollar, which has slid amid worries that the Fed is seemingly keen to effectively print more money to get the U.S. economy going again, possibly as soon as its next meeting in early November. Within minutes of the statement Tuesday, the euro had jumped around 1.5 U.S. cents.

By mid afternoon London time, the euro was trading 0.9 percent higher at $1.3372, just shy of its earlier high of $1.3398. The last time the euro breached $1.34 was in late April at the height of the government debt crisis that engulfed the eurozone and raised questions about the viability of the euro currency itself.

The dollar’s decline was not just confined to the euro though. It was also 0.6 percent lower at 84.62 yen, meaning that it has gone a long way to undoing the effects of last week’s unilateral intervention in the markets to stem the export-sapping appreciation of the yen.

“It would appear that it is now the dollars turn to become the whipping boy of the currency markets again,” said Michael Hewson, a market analyst at CMC Markets.

It’s not just the Fed that’s contemplating introduced new monetary measures to boost its economy. The Bank of England is also seemingly paving the way for further action to support economic growth in Britain.

“For some of these members, the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased,” according to the minutes of the last rate-setting meeting at the bank earlier this month.

Given that the European Central Bank does not appear to be in much of a mood to loosen policy much more beyond what it has, the pound fell to a four-month low against the euro, though it was flat against the dollar around the $1.56 mark.

By mid afternoon London time, the euro was 0.8 percent higher at 0.8559 pound, its highest level since late May.

“The prospect of additional stimulus sent the pound lower,” said Eric Viloria, currency strategist at Forex.com.

Earlier in Asia, stocks had a back and forth session, with most benchmarks ending the day in negative territory. Markets were closed for holidays in South Korea, mainland China and Taiwan.

In Japan, the Nikkei 225 stock average closed down 0.4 percent at 9,566.32 as the yen strengthened, with exporters, such as Toyota Corp. and Canon Inc. losing ground in particular.

Benchmark crude for November delivery was up 63 cents to $75.60 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.22 to settle at $74.97 on Tuesday.

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AP Business Writer Greg Keller in Paris contributed to this report.

(This version CORRECTS Corrects typo in headline. Updates details throughout. Adds analysts’ comments. Changes dateline, byline. This story is part of AP’s general news and financial services.)