NEW YORK (Reuters) - The euro slumped to five-month lows on Wednesday amid worries over Greece’s fiscal woes and as global equity markets sold off as China, the world’s growth engine, ordered banks to curb lending to cool its economy.
Crude oil futures dipped below $78 a barrel while copper, a proxy for Chinese growth, shed nearly 2 percent on fears that demand in China will slow as authorities tighten monetary policy.
The lending restrictions in China sparked worries about the global economic recovery, knocking equity markets around the world and pushing the U.S. dollar to a one-month high against a basket of major currencies.
A surge in new lending this month in China triggered a series of steps by authorities to rid the financial system of excess cash that can fuel inflation and asset bubbles.
On Wall Street, U.S. stocks slipped almost 2 percent before recouping some losses, but the Dow Jones industrial average still suffered its worst drop of 2010, while MSCI’s all-country world index fell 1.6 percent. European stocks earlier closed down 1.5 percent.
The stronger dollar crimped commodities prices while investor unease over a conservative outlook from International Business Machines Corp (IBM.N) weighed on technology shares.
IBM’s earnings outlook for 2010 implies a slowdown in earnings-per-share growth compared to recent years, analysts said. Its shares slid 2.9 percent.
“You combine what’s going on in China with the strength in the dollar and you have an unwind of the commodity trade,” said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. “Then you throw in mediocre earnings relative to expectations and the market is taking a well-needed correction.”
The CBOE Volatility index .VIX, Wall Street’s favorite measure of investor fear, settled up more than 6.25 percent, but not before jumping more than 11 percent — its biggest one-day jump in nearly two months — as caution swirled.
Shares of commodity-related companies dragged the S&P materials sector .GSPM down more than 1.5 percent. The Reuters/Jefferies CRB Index .CRB was down about 1.33 percent.
At the close, the Dow Jones industrial average .DJI was down 122.28 points, or 1.14 percent, at 10,603.15, while the Standard & Poor's 500 Index .SPX was down 12.19 points, or 1.06 percent, at 1,138.04. The Nasdaq Composite Index .IXIC was down 29.15 points, or 1.26 percent, at 2,291.25.
European stocks also fell on a drop in commodity shares and as banks fell amid worries about the sector’s health.
The FTSEurofirst 300 .FTEU3 index of top European shares ended 1.54 percent lower at 1,052.53 points.
In currency markets, the euro fell as concerns intensified over cash-strapped Greece’s ability to finance its mounting budget deficit, driving the cost of insuring against a Greek sovereign debt default to a record high.
“Concerns about Greece and the implications for the euro and the euro zone have been the catalyst for the dollar strength,” said John McCarthy, director of foreign exchange at ING Capital Markets in New York.
The dollar was up against a basket of major trading-partner currencies, with the U.S. Dollar Index .DXY at 78.358, up 1.11 percent from a previous session close of 77.500.
The euro last traded at $1.41, down 1.38 percent from a previous session close of $1.4298. Against the Japanese yen, the dollar was up 0.16 percent at 91.25 compared with a previous session close of 91.100.
U.S. Treasury debt prices rose as stock prices fell sharply and on fresh optimism that new government debt supply could moderate after the Democrats lost their supermajority in the U.S. Senate with the election of Republican Scott Brown to fill the seat left vacant by the death of Sen. Edward Kennedy.
U.S. government debt prices joined in a global upward trend, with the benchmark 10-year Treasury note tracking the 10-year German bund. The 10-year note was up 10/32 in price to yield 3.66 percent.
U.S. gold futures hit a two-week low as the dollar’s sharp rally dampened bullion’s investment appeal as a hedge against paper currency depreciation.
Spot gold prices fell $26.35 to $1,111.30 an ounce.
The MSCI Asia-Pacific index excluding Japan eased 1.08 percent while Thomson Reuters index of regional shares .TRXFLDAXPU lost 0.4 percent. Japan's Nikkei .N225 gave up early gains to drop 0.25 percent.