US and European stocks dropped yesterday and the dollar fell for a fourth day in a row as investors grew more concerned over when the Federal Reserve will start to wind down its stimulus program.
The greenback also fell steeply against the pound after the Bank of England said it did not plan to lift interest rates until unemployment falls to seven per cent, a level unlikely for another three years.
But some investors, expecting that level to be reached sooner, brought forward their expectations for a rate hike, supporting sterling.
“Market participants are currently observing a situation where the data suggests a better economic outcome than they expected just a month or two ago,” said Bob Lynch, head of G10 FX strategy for the Americas, at HSBC in New York.
The yen rose to a seven-week high against the dollar on expectations that Japanese investors would convert overseas earnings before the mid-August Obon holiday.
Stocks on Wall Street were lower by late morning, the third down day in a row, though indexes were still not far below record highs.
The Fed’s bond-buying program has been a major driver of the rally in equities this year, which has the S&P 500 up about 18 per cent for the year.
“The risk reward is not the same as it used to be for the market. It used to be that people were anticipating economic recovery and knew the rates would stay low.
“Rates are more competitive now, and it takes real earnings growth to back stocks at these levels,” said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.
Investors have been focused on trying to pinpoint when the Fed may start to reduce its $85 billion a month in bond purchases.
Chicago Fed President Charles Evans said the Fed would probably scale back its bond-buying program later this year, perhaps as early as next month, depending on data.
The Dow Jones industrial average fell 86.41 points, or 0.56 per cent, at 15,432.33. The Standard & Poor’s 500 Index was down 11.42 points, or 0.67 per cent, at 1,685.95. The Nasdaq Composite Index dropped 29.08 points, or 0.79 per cent, at 3,636.69.
Uncertainty over the Fed weighed on European shares as well, as did the guidance from the Bank of England. Europe’s broad FTSE Eurofirst 300 index shed 0.3 per cent and the MSCI world equity index was down 0.7 per cent.
Sterling climbed to its highest against the greenback in one-and-a-half months as investors viewed BoE Governor Mark Carney’s comments as less dovish than expected. The pound was last up 1.1 per cent at $1.5511.