GLOBAL MARKETS-U.S. yields and dollar up on outlook on Fed tapering

Tue Jan 21, 2014 1:48pm EST

(Repeats to add WRAPUP 7 to slugline)

* Gold down most since start of January

* U.S. stocks mixed; Dow Chemical surges on Loeb stake

* Chinese money market rates ease on central bank injection

* European stocks at 5-1/2 year high; world stocks flat

* Turkish lira at record low

By Barani Krishnan

NEW YORK, Jan 21 (Reuters) - U.S. Treasury prices edged down and the dollar rose on Tuesday while gold posted its largest decline since the start of the year on speculation the Federal Reserve will further pare its bond-buying stimulus next week.

U.S. stocks were mixed after heavy selling in U.S. futures contracts initially took the cash indexes lower. Global equities held steady after European stocks touched a 5-1/2-year high.

Treasuries yields rebounded from five-week lows as bond prices fell.

"I am confident that the Fed is going to its tapering approach," said Phillip Streible, senior commodities broker at brokerage RJ O'Brien. "There's been sustained improvement in the global economic recovery, and that should continue to dampen safe-haven asset demand."

A report in The Wall Street Journal said the Fed is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the U.S. central bank's expectations for solid economic growth this year.

The Fed's policy-setting committee will meet on Jan. 28-29.

"The view out there is there's going to be continued tapering on a gradual basis," said Mike Cullinane, head of Treasuries trading with D.A. Davidson in St. Petersburg, Florida. "Another $10 billion in tapering is a logical way to go."

The Fed last month trimmed its monthly purchase of Treasuries and mortgage-backed securities to $75 billion, down from $85 billion.

The spot price of gold slipped about 1 percent, the most since the year began, to below $1,241 an ounce. On Monday, gold hit its highest level since mid-December, at $1,259.85.

The Dow Jones industrial average was down 75.68 points, or 0.46 percent, at 16,382.88. The Standard & Poor's 500 Index was up 1.33 points, or 0.07 percent, at 1,840.03. The Nasdaq Composite Index was up 17.51 points, or 0.42 percent, at 4,215.09.

Three Dow components fell after reporting earnings, giving back advances made before the opening bell.

Shares of insurer Travelers Cos Inc fell 1.7 percent to $84.96 after the company's slowing pace of price hikes raised concerns about its profit margins and overshadowed a three-fold rise in quarterly profit.

Shares of Verizon Communications Inc also fell, losing 2 percent to $47.34, New Street Research analyst Jonathan Chaplin the decline was likely due to profit taking ahead of the closing next month of Verizon's purchase of Vodafone's stake in Verizon Wireless.

Dow Chemical bucked the downward trend, surging 6.1 percent to $45.72. Activist investor and hedge fund manager Daniel Loeb has taken a stake in the company and wants it to spin off its petrochemical arm.

The benchmark 10-year U.S. Treasury note was unchanged with the yield at 2.8268 percent.

The 10-year yield was as high as 2.867 percent overnight after hitting 2.818 percent on Friday, which was its lowest level since Dec. 11, according to Reuters data.

Traders and analysts expect the yield to hold in a range between 2.75 percent to 3.00 percent heading into next week's Fed policy meeting.

World stocks were flat.

European stocks rose to a 5-1/2-year high after a move by China to inject money into financial markets eased concerns about a credit crunch that could hamper growth.

European shares also were boosted as results from Unilever and Remy Cointreau SA sparked optimism.

Chinese money market rates fell after the country's central bank injected more than 255 billion yuan ($42 billion) into the financial system, easing concerns that another credit crunch was under way less than a month after a late December squeeze.

The key Euribor lending rate held steady as banks began reducing their reliance on European Central Bank funding as they turn again to the market. The ECB has pledged to intervene should the rise in bank-to-bank lending rates that underpin borrowing costs across the economy become "unwarranted."

German government bond futures fell 4 ticks.

The euro fell toward Monday's two-month troughs after the ZEW indicator of German economic sentiment for January unexpectedly fell to 61.7 after surging to 62.0 in December.

The dollar was broadly stronger, bouncing to 104.16 yen on the speculation of another Fed stimulus cut. The yen was also under pressure after Japan's central bank began a two-day policy meeting, where it is expected to keep its massive quantitative easing program unchanged.

Turkey's lira plunged to a record low against the dollar after the central bank left interest rates unchanged, defying some market expectations for a rise, given high inflation and the weak currency.

The lira has hit a string of record lows as a government corruption scandal undermines already fragile investor confidence. Turkey's huge current account deficit, which it relies on foreign investment to finance, means its economy is seen as highly vulnerable to the withdrawal of Fed stimulus.

Among commodities, Brent crude oil was up 0.7 percent at $107.09 a barrel as the International Energy Agency raised its forecast for global oil demand this year, citing accelerating economic growth. (Additional reporting by Carolyn Cohn and Anirban Nag in London; Editing by Leslie Adler)

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