Fed talk spurs dollar strength, energy drags stocks

By Chuck Mikolajczak

NEW YORK (Reuters) - Global equity markets fell and the dollar advanced on Wednesday as hawkish comments by Federal Reserve officials raised the possibility of more U.S. interest rates hikes this year than investors are anticipating.

The dollar was up 0.48 percent to 96.104 against a basket of major currencies, moving towards its first weekly gain in four weeks.

Last week, U.S. central bank policymakers cut in half the number of rate hikes projected in 2016 to two, weakening expectations for a move at either the April or June policy meetings. Fed Chair Janet Yellen later told reporters that "caution is appropriate" when it comes to raising rates.

But in the past two days, several Fed officials have expressed views that suggest an appetite for more hikes regardless of the volatility that has been the hallmark of financial markets this year.

"We had the battling Fed governors out there. They seem to be disagreeing with what Yellen had said, so it's creating some uncertainty out there," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

"To the extent that the Fed is in play for a rate increase sooner than later, the currency trade is for a stronger dollar."

Philadelphia Fed President Patrick Harker, who is not a voting member of the policy-setting Federal Open Market Committee this year, said on Tuesday the central bank should consider another rate hike as early as next month. He is scheduled to speak again at 5:30 p.m. EDT (2130 GMT) on Wednesday.

St. Louis Fed President James Bullard, who is a voting member of the FOMC in 2016, said on Bloomberg TV on Wednesday he would like to see further stabilization in inflation expectations.

The stronger dollar also dampened demand for oil, while a report showing U.S. crude stockpiles soared to record highs for a sixth straight week, tripling what analysts had expected, rekindled worries of a glut and further pressured the commodity.

The weakness in energy names also helped push stocks lower in the United States and Europe. The STOXX Europe 600 oil and gas index and the S&P energy index were both off at least 1.6 percent, with the latter the worst performing of the 10 major S&P sectors.

The FTSEuroFirst 300 index of leading shares closed down 0.11 percent at 1,336.70. MSCI's index of world shares lost 0.65 percent.

The Dow Jones industrial average fell 31.02 points, or 0.18 percent, to 17,551.55, the S&P 500 lost 8.39 points, or 0.41 percent, to 2,041.41 and the Nasdaq Composite dropped 37.66 points, or 0.78 percent, to 4,784.00.

Gold also weakened in the face of the stronger dollar, down 2 percent to $1,223.62 after hitting a low of $1,215.10, its lowest level since Feb. 26.

Britain's pound slumped 0.75 percent to $1.41 amid rising concerns that Tuesday's attacks in Brussels would bolster the campaign for a vote to leave the European Union in June's "Brexit" referendum.

Derivatives allowing investors to insure themselves against sharp moves in sterling exchange rates ahead of that vote reached their highest level since the 2010 elections.

Benchmark U.S. 10-year notes were last up 12/32 in price to yield 1.8927 percent, down from 1.935 percent on Tuesday.

(Reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Paul Simao)