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Stocks, dollar dip as Fed decision on stimulus looms

A man walks through the lobby of the London Stock Exchange August 5, 2011. REUTERS/Suzanne Plunkett

By Blaise Robinson

PARIS (Reuters) - Shares dipped and the dollar lost ground on Tuesday as investors consolidated positions before this week's U.S. Federal policy meeting at which the central bank is set to start scaling back stimulus.

German Bunds also edged lower, with Bund futures down 0.2 percent at 138.24, increasing their losses after a survey from ZEW economic think tank showed German analyst and investor sentiment rose more than expected in September, prompting a search for higher yielding assets.

The monthly poll of economic sentiment rose to 49.6 from 42.0 in August, reaching the highest level since April 2010 and beating the consensus forecast for a rise to 46.0.

Despite the stronger-than-expected figure, equity investors were reluctant to chase stocks higher, a day after Germany's DAX (.GDAXI) jumped to a record high and the MSCI's world equity index <.MIWD00000PUS> hit a five-year high, and as the Fed is set to trim its quantitative easing program which has been a major factor behind the brisk stock rally of the past year.

The MSCI world index was down 0.2 percent around 1100 GMT, while Europe's FTSEurofirst 300 (.FTEU3) index of top European shares was down 0.5 percent.

In Asia, the MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> lost 0.3 percent, while Japan's Nikkei stock average (NIK:^9452) closed 0.7 percent lower.

The Fed's Open Market Committee begins its two-day meeting on Tuesday, and despite a lackluster August U.S. jobs report, it is expected to trim its monthly asset purchases by about $10 billion from $85 billion.

"With the Fed set to start trimming down its quantitative easing program, we could see the return of volatility, especially for markets that have benefited the most from it, such as U.S. stocks," said Roland Kaloyan, global asset allocation strategist, at Societe Generale CIB, in Paris.

"The Fed's liquidity played a key role in the rally that has propelled U.S. stocks to record highs this year, while at the same time, company fundamentals and earnings momentum are not that great, so we could see some profit taking following the Fed's announcement tomorrow."

The MSCI world equity index has gained 12.6 percent so far this year, while Wall Street's S&P 500 (.SPX) is up 19 percent.

The dollar was down 0.2 percent versus a basket of currencies on Tuesday, at 81.141 (NYF:^), but remained in a tight range, having recovered from a four-week low of 80.968 set on Monday.

"Once the Fed will announce the first reduction of its quantitative easing program, the debate will quickly shift to the timing of the central bank's first interest rate hike, and this should put pressure on short-term U.S. treasuries and boost the dollar," SG's Kaloyan said.

With the Fed looking set to take its first step to wind down its stimulus, investors will also be focusing on the central bank's guidance on its future policy stance on Wednesday.


"On top of the size of tapering, what's more important this time is the Fed's forecast of interest rates in 2016, which will give markets an idea on the pace of future rate hikes," said Sho Aoyama, senior market analyst at Mizuho Securities.

Brent crude fell below $110 a barrel as easing worries over a potential U.S. military action on Syria calmed concerns of a disruption to Middle East oil supplies and after output resumed at a western Libyan oilfield.

U.S. air strikes on Syria now look unlikely after a deal to remove Syria's chemical weapons, although the United States, Britain and France have warned President Bashar al-Assad of consequences if he fails to comply.

"The market believes the U.S. dollar will strengthen if monetary conditions are tightened, which would put some pressure on oil," Commerzbank senior oil and commodities analyst Carsten Fritsch said.

Gold hovered just above a five-week low, while copper edged higher on Tuesday but stayed close to five-week lows in cautious trade ahead of the Fed.

(Additional reporting by Christopher Johnson, Masayuki Kitano and Hideyuki Sano. Editing by Jeremy Gaunt)