Wall Street falls, dollar up on March Federal Reserve rate hike bets

Wall Street pulled back from Wednesday's records, led by financials, while the dollar traded at a seven-week high on positive US data and growing expectations the Federal Reserve will soon raise interest rates.

Treasury yields also rose after Fed Governor Lael Brainard said late Wednesday that an improving global economy and a solid US recovery meant it would be "appropriate soon" to raise rates — the latest of several Fed officials making hawkish statements this week.

Fed Chair Janet Yellen is set to speak on the economic outlook in Chicago on Friday in her last speech before the Fed's March 14-15 meeting.

Federal funds futures prices suggest markets now see a 77.5 per cent chance of a 25-basis-point rate hike in March, up from 66 per cent on Wednesday and 35 per cent on Tuesday, according to CME Group's FedWatch tool.

The prospect of higher rates pushed equities down on Thursday, compounding the pressure after Wednesday's rally, in which all three major indexes hit records.

"It was an awfully strong rally yesterday without necessarily a lot of real news to justify it, so I think you're just getting some profit taking today," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.

The stock market is "overdue for a correction" because valuations are so high, said Robert Phipps, a director at Per Stirling Capital Management in Austin.

The Dow Jones Industrial Average fell 112.58 points, or 0.53 per cent, to 21,002.97, the S&P 500 lost 14.04 points, or 0.59 per cent, to 2,381.92 and the Nasdaq Composite dropped 42.81 points, or 0.73 per cent, to 5,861.22.

MSCI's global stocks index was down 0.5 per cent after touching an intraday record high.

The dollar index, which measures the greenback against a basket of six major currencies, was last up about 0.4 per cent at seven-week highs, helped by data as well as rate hike bets. The number of Americans filing for unemployment benefits fell to a nearly 44-year low last week, pointing to further tightening of the labour market.

The greenback was last up 0.6 per cent against the Japanese yen , the highest since February 15, while the euro fell 0.4 per cent to $1.0507.

"It's entirely Fed-focused at the moment," said Craig Erlam, senior market analyst at Oanda in London.

In fixed income markets, US Treasury yields pushed higher on the prospect of higher rates. US two-year yields hit their highest since August 2009, at 1.34 per cent, while the 3-year yield hit a nearly 11-week high of 1.617 per cent. The 10-year note yield hit a more than two-week high of 2.505 per cent.

Oil prices fell for a third consecutive day after a record build-up in US crude inventories and data showing Russian oil production cuts have stalled. Brent crude ended the session down 2.3 per cent at $55.08 a barrel while US crude settled down 2.3 per cent at $52.61.

The dollar put metals prices under pressure. Copper fell 1.4 per cent to $5,929.85 a tonne while gold fell 1 per cent to $1,234.71 an ounce.

"The previous two occasions ahead of a Fed hike, we've seen gold weaken only to rally in the aftermath and that could potentially be seen once again," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.