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NEW YORK The dollar fell to a 7-week low against the yen on Wednesday while U.S. and European stocks waned as investors mulled when the Federal Reserve may start to remove the massive stimulus it has injected into the economy and markets.
The greenback also fell steeply against the pound after the Bank of England said it did not plan to lift interest rates until British 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 climbed on expectations that Japanese investors would convert their overseas earnings before the mid-August Obon holiday. In addition, the Bank of Japan will conclude a two-day policy meeting on Thursday and is expected to continue its asset-buying program.
Stocks on Wall Street ended lower, the third down day in a row, though indexes were still not far below record highs. The Fed's $85 billion a month bond-buying program has been a major driver of the rally in equities this year, which has boosted the S&P 500 by about 18 percent for the year.
"People were concerned about the extent of the rally in the short term and some people are talking about equities being too expensive relative to the underlying fundamentals," said Stephen Massocca, managing director at Wedbush Equity Management LLC in San Francisco.
"And of course, the big story, the next big piece of news, one would think, is the taper tantrum."
Investors have been focused on trying to pinpoint when the Fed may start to reduce its bond purchases.
Chicago Fed President Charles Evans said Tuesday the Fed would probably scale back later this year, perhaps beginning as early as next month, depending on economic data.
The Cleveland Fed's Sandra Pianalto said on Wednesday the central bank could soon begin winding down if the recent improvement in the labor market persists.
The Dow Jones industrial average .DJI ended down 48.07 points, or 0.31 percent, to 15,470.67. The Standard & Poor's 500 Index .SPX fell 6.46 points, or 0.38 percent, to 1,690.91. The Nasdaq Composite Index .IXIC was off 11.76 points, or 0.32 percent, to 3,654.01.
The uncertainty over the Fed weighed on European shares too, as did the guidance from the Bank of England. Europe's broad FTSE Eurofirst 300 index .FTEU3 ended down 0.3 percent and the MSCI world equity index .MIWD00000PUS fell 0.6 percent.
Sterling climbed to its highest against the greenback in one and a half months as investors viewed new BoE Governor Mark Carney's comments as less dovish than expected. The pound was up 0.9 percent at $1.55.
The dollar was down 1.4 percent against the yen at 96.42 yen. Businesses in Japan close 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. Treasuries holdings.
The dollar index was down 0.4 percent at 81.26 .DXY.
"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."
Treasuries prices rose as higher yields attracted buyers to the Treasury's 10-year note auction, the second of three Treasury coupon sales this week.
Ten-year Treasury notes were up 12/32 in price to yield 2.599 percent.
Oil tumbled on an expected increase in North Sea crude output next month. Brent crude fell 74 cents to settle at $107.44 a barrel, while U.S. oil lost 93 cents to settle at $104.37 a barrel.
(Additional reporting by Richard Hubbard in London and Chuck Mikolajczak and Gertrude Chavez-Dreyfuss in New York; Editing by Dan Grebler)