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

Fed policy hint weighs on stocks as dollar slides

LONDON — World stock markets fell Wednesday while the euro spiked above $1.34 for the first time in nearly five months as the Federal Reserve’s hint that it is ready to provide more assistance to the flagging U.S. economy continued to dominate trading.

In Europe, the FTSE 100 index of leading British shares closed down 24.28 points, or 0.4 percent, at 5,551.91 while Germany’s DAX fell 67.65 points, or 1.1 percent, at 6,208.33. The CAC-40 in France was 49.35 points, or 1.3 percent, lower at 3,735.05.

In the U.S., the Dow Jones industrial average was down 41.51 points, or 0.4 percent, at 10,719.52 around midday New York time, while the broader Standard & Poor’s 500 index fell 6.91 points, or 0.6 percent, to 1,132.87.

After an early rally following 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,” investors have grown jittery.

On the one hand, while the prospect of more money swirling around the financial system could be a boon to stocks, the Fed’s concerns over falling prices and faltering growth darkened sentiment.

However, the Fed’s announcement has been bad for the dollar — within minutes of the statement Tuesday, the euro had jumped around 1.5 U.S. cents.

“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.

By late afternoon London time, the euro was trading 1 percent higher at $1.3380, down from its earlier high of $1.3440. That was the first time the euro had traded above $1.34 since April 27.

The dollar’s decline was not just confined to the euro though. It was also 0.9 percent lower at 84.36 yen, meaning that it has gone a long way to undoing the effects of last week’s unilateral intervention by Japanese authorities in the markets to stem the export-sapping appreciation of the yen.

Analysts said traders should be on the lookout for another intervention from the Japanese monetary authorities — after all, precedence suggests that the Bank of Japan will be back in the markets buying dollars and selling yen.

“Without intervention we anticipate that the dollar would now be training in the low 80’s,” said Lee Hardman, currency strategist at The Bank of Tokyo-Mitsubishi UFJ. “As the current dynamic is unlikely to change in the near-term, then it is highly likely that the Japanese authorities will soon have to intervene again to defend the line in the sand at 82 yen.”

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 — by late afternoon London time, the euro was 0.9 percent higher at 0.8565 pound, its highest level since late May.

Because the dollar is even more under pressure, the pound was actually 0.1 percent higher at $1.5626.

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 32 cents to $75.29 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.