World stock markets fell Thursday while the dollar strengthened to a three-month high against the euro after the
Federal Reserve signaled 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 31 points, or 0.6 percent, at 5,289.26 while Germany's DAX fell 28.08 points, or 0.5 percent, to 5,875.35. The CAC-40 in France was 22.32 points, or 0.6 percent, lower at 3,853.50.
Earlier in Asia, the Nikkei 225 stock average shed 13.61 points, or 0.1 percent, to 10,163.80, and Hong Kong's Hang Seng slid 264.11 points, or 1.2 percent, to 21,347.63.
Thursday's losses came after a late bout of selling on Wall Street pushed U.S. stocks down to session lows. Further selling is expected at the open later — Dow futures were 34 points, or 0.3 percent, lower at 10,356 while the broader Standard & Poor's 500 futures fell 4 points, or 0.4 percent, to 1,101.70.
The catalyst for the selling came with the 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 back into the dollar and out of stocks.
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. Cheap dollars were used to buy potentially higher-yielding assets like stocks, commodities and foreign currencies.
"The trigger for the dollar rebound is the Fed confirming that many of its liquidity providing measures will be unwound early next year," said Hans Redeker, global head of foreign exchange research at BNP Paribas.
By mid morning London time, the euro was down 1.3 percent at $1.4350, having fallen to $1.4330, its lowest level since early Sept. 7. Meanwhile, the dollar was 0.2 percent higher at 89.96 yen.
Also weighing on the euro was the news that Standard & Poor's downgraded its credit rating on Greece, arguing that the government's plan was unlikely to lead to a "sustainable" reduction in the country's debts.
"While there are no realistic expectations that the deficit issues facing Greece — and Ireland, Spain and Portugal — will lead to a breakdown of European Monetary Union, the problems do highlight that an inflexible and strong exchange rate can be a burden in times of stress," said Jane Foley, research director at Forex.com.
Investors are also fully aware that gains could well peter out as this is the last full trading week of 2009 and investors may use the opportunity to bolster their portfolios by locking in gains made over the last nine months.
Earlier in Asia, South Korea's Kospi dropped 1 percent to 1,647.84 and Shanghai's market tumbled 2.3 percent to 3179.08. Markets in Taiwan, Singapore and Indonesia also fell.
Australia's market bucked the trend, adding 0.2 percent.
Oil prices fell in Asia, with benchmark crude for January delivery down 36 cents to $72.30. On Wednesday, the contract surged by $1.97.
