World stocks drop as dollar hits 3-month euro high

LONDON -- World stock markets fell Thursday while the dollar strengthened to a three-month high against the euro after the Federal Reserve signaled it would start undoing some of its emergency supports next year as the economic recovery gathers pace.

In Europe, the FTSE 100 index of leading British shares was down 60.61 points, or 1.1 percent, at 5,259.65 while Germany's DAX fell 49.47 points, or 0.8 percent, to 5,853.96. The CAC-40 in France was 26.39 points, or 0.7 percent, lower at 3,849.43.

Wall Street is also poised to open lower after a bout of selling at Wednesday's close -- Dow futures were 57 points, or 0.6 percent, lower at 10,333 while the broader Standard & Poor's 500 futures fell 7.8 points, or 0.7 percent, to 1,097.90.

The catalyst for the selling came with the release of the minutes to the last rate-setting meeting of the Fed.

Though the Fed reiterated its pledge to keep interest rates near zero, it noted improvements in the economy and detailed the beginnings of a plan to dismantling a number of its extraordinary lending measures in 2010.

The news stoked speculation the central bank might increase interest rates sooner than expected, leading many investors to shift out of stocks.

"Investors remain mindful of the fact that low rates are a temporary measure, with the morning's results showing no perceptible surge in the markets," said Philip Gillett, sales trader at IG Index.

"The Fed's upgraded assessment of market conditions is indicative that it's nudging closer to what must be its ultimate goal of withdrawing financial support in early 2010," he added.

America's ultra-low borrowing costs have contributed to a nine-month bull run in stocks and the sharp fall in the dollar this year. Cheap dollars were used to buy potentially higher-yielding assets like stocks, commodities and foreign currencies.

By early afternoon London time, the euro was down 1.4 percent at $1.4335, having fallen to $1.4330, its lowest level since early Sept. 7. Meanwhile, the dollar was 0.4 percent higher at 90.07 yen.

Also weighing on the euro was the news that Standard & Poor's downgraded its credit rating on Greece, arguing that the government's plan was unlikely to lead to a "sustainable" reduction in the country's debts.

"While there are no realistic expectations that the deficit issues facing Greece -- and Ireland, Spain and Portugal -- will lead to a breakdown of European Monetary Union, the problems do highlight that an inflexible and strong exchange rate can be a burden in times of stress," said Jane Foley, research director at Forex.com.

Investors are also fully aware that gains could well peter out as this is the last full trading week of 2009 and investors may use the opportunity to bolster their portfolios by locking in gains made over the last nine months.

Earlier in Asia, the Nikkei 225 stock average shed 13.61 points, or 0.1 percent, to 10,163.80, and Hong Kong's Hang Seng slid 264.11 points, or 1.2 percent, to 21,347.63.

Meanwhile, South Korea's Kospi dropped 1 percent to 1,647.84 and Shanghai's market tumbled 2.3 percent to 3179.08. Markets in Taiwan, Singapore and Indonesia also fell.

Australia's market bucked the trend, adding 0.2 percent.

Oil prices fell, with benchmark crude for January delivery down 75 cents to $71.91. On Wednesday, the contract surged by $1.97.