By Caroline Valetkevitch
NEW YORK (Reuters) - Global stocks fell on Tuesday while the yield on two-year U.S. Treasury notes rose to almost a 15-year high as investors prepared for the likelihood of another 75-basis-point interest rate hike from the Federal Reserve.
The Fed is set to announce its decision on Wednesday at the end of a two-day policy meeting. Rate futures traders are pricing in an 81% chance of a 75 basis point hike and a 19% probability of a 100 bps of tightening.
Britain, Norway, Switzerland and Japan also have monetary policy meetings this week.
Earlier on Tuesday, Sweden's central bank raised interest rates by a larger-than-expected full percentage point to 1.75% and warned of more to come over the next six months.
The U.S. two-year note, which is highly sensitive to shifts in monetary policy expectations, earlier on Tuesday hit 3.992%. The last time its yield broke above 4% was Oct. 18, 2007.
Yields on the benchmark 10-year Treasury shot to 3.604% before paring some gains. They were up 8 basis points to 3.569% after topping 3.5% for the first time in 11 years on Monday.
The Fed and other banks are trying to take an aggressive stance to tackle inflation, but investors have also worried about the impact of higher rates on the global economy.
On Wall Street, investors were cautious of making new bets.
"Investors are just selling the Fed," said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, Oklahoma. "All of the bad that was ignored, we're getting all of that back. People are pessimistic."
Shares of Ford Motor Co sank after the automaker said inflation-related supplier costs will run about $1 billion higher than expected in the current quarter.
The Dow Jones Industrial Average fell 313.45 points, or 1.01%, to 30,706.23, the S&P 500 lost 43.96 points, or 1.13%, to 3,855.93 and the Nasdaq Composite dropped 109.97 points, or 0.95%, to 11,425.05.
The pan-European STOXX 600 index lost 1.09% and MSCI's gauge of stocks across the globe shed 0.85%.
The dollar rose, trading near a two-decade high, as investors held firm on expectations of another aggressive rate hike by the Fed.
The dollar index was on track for its fifth weekly gain in six and was last up 0.5% at 110.13. It hit 110.79 this month for the first time since June 2002.
"Traders and investors are taking cover, aware that the dollar is behaving like a force of nature, and unwilling to face its wrath," said Karl Schamotta, chief market strategist at Corpay in Toronto.
The rate hike by Sweden's central bank was larger than analysts had expected, causing the Swedish crown to briefly spike against the euro and dollar.
Hikes from the Bank of England and Swiss central bank are expected on Thursday.
China's central bank kept its benchmark lending rates unchanged at a monthly fixing on Tuesday, as expected.
The Bank of Japan has shown no sign of abandoning its ultra-easy yield curve policy despite a big slide in the yen and inflation hitting its fastest pace in eight years.
The dollar was last up about 0.4% against the Japanese currency. It climbed as high as 144.99 on Sept. 7 for the first time in 24 years.
Oil prices eased as the dollar stayed strong.
Brent crude futures settled down $1.38, or 1.5%, to $90.62 a barrel, while U.S. crude for October delivery ended at $84.45, down $1.28, on the day of its expiration. The more active November contract settled down $1.42 to $83.94 a barrel.
(Additional reporting by Huw Jones in London and Gertrude Chavez-Dreyfuss; Editing by Edwina Gibbs, Will Dunham and Alison Williams)