GLOBAL MARKETS-Stocks fall on Fed concern; dollar hits 5-yr high vs yen

Fri Dec 13, 2013 2:59pm EST

* MSCI World Index on track for worst two weeks since June

* Dollar gains versus euro, bolstered by view on Fed taper

* Brent crude falls toward $108 a barrel; gold rises

By Wanfeng Zhou

NEW YORK, Dec 13 (Reuters) - The U.S. dollar hovered near a five-year high against the yen and rose against the euro on Friday, while global equity indexes slipped on growing concerns the U.S. Federal Reserve could surprise investors by scaling back its stimulus as early as next week.

Stronger-than-expected U.S. data and a budget deal in Washington have brightened the outlook for the U.S. economy, but are causing jitters in equity markets, which have benefited from ample central bank liquidity. The current Thomson Reuters consensus among economists is still for the Fed to begin withdrawing stimulus in March.

"There's a lot of uncertainty going into the meeting and some are talking about a small taper next week, although that is not our view. We still think the Fed will wait until January to make any announcement," said Greg Moore, currency strategist, at TD Securities in Toronto.

The Fed will hold its last policy meeting of the year on Tuesday and Wednesday.

Concerns about a possible Fed surprise next week resulted in U.S.-based funds pulling $6.51 billion out of stock mutual funds in the past week, the biggest outflow this year, according to Thomson Reuters Lipper data released on Thursday.

The MSCI world equity index was down 0.1 percent at 391.70 points, taking its losses for the past two weeks to 2.6 percent and putting it on track for its biggest fortnightly loss since June.

The prospect of Fed tapering boosted the dollar, with the euro falling 0.2 percent to $1.3731.

The dollar slipped against the yen after earlier hitting five-year highs. It last traded at 103.17 yen, down 0.2 percent on the day.

U.S. stocks were mostly lower after a three-day drop. The Dow Jones industrial average gained 6.81 points, or 0.04 percent, to 15,746.24. The Standard & Poor's 500 Index dropped 1.33 points, or 0.07 percent, to 1,774.17. The Nasdaq Composite Index lost 2.32 points, or 0.06 percent, to 3,996.08.

The pan-European FTSEurofirst 300 touched two-month lows and ended down 0.1 percent at 1243.47 points.

Emerging markets were also hit, with sell-offs in currencies -- including the Indonesian rupiah and the Indian rupee -- on concern that tighter Fed policy could sap flows into emerging markets.

"We have taken down our exposure to some of the smaller markets, as the tapering can be a hassle for some emerging-market currencies," said Hans Peterson, the global head of investment strategy at SEB Private Banking.

Given the scale of the market moves in anticipation of the Fed meeting, some analysts said a rebound in equities was possible once the meeting is over, whether the Fed acts or not.

"I think either way we can get a relief rally post the Fed, because either we will get a very small taper and really strong guidance on rates, or we will get no taper," said Alan Higgins, chief investment officer, UK, at Coutts.

Expectations for Fed tapering and prospects for oil ports in eastern Libya to resume exports pressured oil prices.

January Brent gained 13 cents to $108.80 a barrel in seesaw trading, following a fall of more than $1 on Thursday. Brent has slipped 3 percent so far this week, the steepest weekly loss since the end of September.

U.S. crude futures for January fell 90 cents to settle at $96.60 a barrel, after rising around $6 in the past two weeks.

Gold rose about 1 percent to $1,235 an ounce after a two-day fall, but sentiment remained fragile.

Benchmark U.S. 10-year Treasury notes last traded up 4/32 in price to yield 2.8628 percent, after data showed muted inflation pressures, reviving hopes the Federal Reserve will not reduce its bond purchase stimulus program next week.

Two-year German yields hit a three-month high as banks repaid the highest weekly amount since February to the European Central Bank.

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