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NEW YORK The dollar and world equity markets retreated on Wednesday as persistent concerns about central banks' support for their economies - and financial markets - weighed on the near-term prospect for stocks and other "risk" assets.
Stocks, bonds, commodities and the dollar all suffered a sharp selloff on Tuesday when the Bank of Japan's decision to leave its policies unchanged spooked investors already worried the Federal Reserve will soon curb its bond-buying program.
The dollar index of the greenback versus six other major currencies dropped to its lowest in nearly four months, weighed by uncertainty over when the Fed will pare back its ultra-loose monetary policy.
The index .DXY fell as low as 80.748, its lowest since February 20, and was last down 0.19 percent at 80.960.
The euro rebounded to gain 0.14 percent to $1.3332 against the greenback.
"There is a lot of consolidation going on headed into next week's Fed meeting," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C. "There is broad volatility and people are afraid the Fed will push off its bond-buying tapering until later in the year."
Equities traders said they saw little room for bigger near-term gains. Early gains in stocks on Wednesday were more a "recovery rally" rather than anything more fundamental, said Peter Rice, director of strategy at Logic Investments. "Realistically, we're looking range-bound," he said.
A reduction in the Fed's bond buying would erode one of the pillars of the U.S. stock market's rally this year and spark more volatile prices and a decline in indexes from recent historic highs.
The CBOE Volatility Index .VIX, referred to as Wall Street's fear gauge, shot up 8.9 percent to 18.59. The index has jumped more than 20 percent so far this week.
The Dow Jones industrial average .DJI closed down 126.79 points, or 0.84 percent, at 14,995.23. The Standard & Poor's 500 Index .SPX fell 13.61 points, or 0.84 percent, to 1,612.52. The Nasdaq Composite Index .IXIC shed 36.52 points, or 1.06 percent, at 3,400.43.
Earlier in Europe, the pan-European FTSEurofirst 300 index .FTEU3 of leading regional shares turned lower after early gains, falling 0.41 percent to close at 1,174.79.
The euro zone's blue-chip Euro STOXX 50 index .STOXX50E fell 0.62 percent to 2,666.52.
MSCI's all-country world equity index .MIWD00000PUS fell 0.42 percent.
"There just isn't much news to offset the potential negative of what will eventually happen, which is the Fed tapering off," said Rick Meckler, president of hedge fund LibertyView Capital Management in Jersey City, New Jersey.
"You don't have fundamental evidence that the Fed will or will not be tapering off soon, and the market is caught in the middle period," he said.
The Fed appears to be moving toward stepping out of quantitative easing while the BoJ has an aggressive policy in place but is not eager to add to it, said Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
"Increasingly, monetary policy appears to have reached its limit in terms of stimulus," she said.
Brent crude rose above $103 despite an unexpected jump in U.S. oil inventories and a cut in estimates for demand growth by the world's big oil market forecasters.
The International Energy Agency said modest economic growth was limiting oil demand worldwide and some developed economies would have absolute declines in consumption this year.
Brent crude oil futures recovered sharply to settle at $103.49 a barrel, up 53 cents on the day, after falling to a low of $102.23 earlier in the session.
U.S. light crude oil settled up 50 cents at $95.88.
Gold rebounded from the previous session's three-week low. U.S. Comex gold futures for August delivery settled up $15 an ounce to $1,392.
U.S. government debt prices rebounded but then traded near break-even in choppy trade. The benchmark 10-year U.S. Treasury note was down 12/32 in price to yield 2.2316 percent.
(Reporting by Herbert Lash; Editing by Dan Grebler and James Dalgleish)