GLOBAL MARKETS-Shares, dollar drop on Fed tapering unease
* Fed officials' comments raise concern over stimulus pullback
* Bank of England ties rates to jobs; lifts sterling
* Wall St and European shares lower
* Yen touches 7-week high against dollar ahead of Japanese holiday
By Leah Schnurr
NEW YORK, Aug 7 (Reuters) - U.S. and European stocks dropped on Wednesday 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 7 percent, 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.
"In a data-dependent world, markets will not be complacent and accepting of central bank forecasts when current data suggests otherwise."
The yen rose to a seven-week high against the dollar on expectations that Japanese investors would convert their 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 percent 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.
"With earnings almost over, we aren't left with bellwether stock stories that prevent some level of profit-taking."
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 Tuesday the Fed would probably scale back its bond-buying program later this year, perhaps beginning to do so as early as next month, depending on economic data.
That was similar to earlier comments by Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, although he told Market News International the central bank might continue its stimulus program if growth does not meet its targets.
The Dow Jones industrial average was down 86.41 points, or 0.56 percent, at 15,432.33. The Standard & Poor's 500 Index was down 11.42 points, or 0.67 percent, at 1,685.95. The Nasdaq Composite Index was down 29.08 points, or 0.79 percent, at 3,636.69.
The 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 percent and the MSCI world equity index was down 0.7 percent.
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 percent at $1.5511.
The dollar was down 1.2 percent against the yen at 96.62 yen . Businesses in Japan shut for a couple of weeks around mid-August for the Obon holidays and markets participants expect yen demand from Japanese investors to rise ahead of big capital inflows around the same time from interest payments on the country's massive U.S. Treasury holdings.
The dollar index was down 0.4 percent at 81.33.
"Dollar sentiment hasn't been the same since last week's tepid U.S. jobs report, which suggested the Fed would move more patiently to slow a stimulus program that has long been a thorn in the dollar's side," said Joe Manimbo, senior market analyst at Western Union Business Solutions.
"A slower U.S. data calendar this week also has not offered a fresh impetus for investors to bid the dollar higher."
U.S. Treasuries prices rose as some traders anticipated firm demand at a $24 billion auction of 10-year notes later in the day. Ten-year Treasury notes were up 6/32 in price to yield 2.6176 percent.
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