By Ellen Freilich
NEW YORK (Reuters) - Stocks fell on Wall Street on Wednesday, reviving a modest bid for battered safe-haven U.S. debt as signs of strength in the U.S. economy fanned fears the Federal Reserve might soon begin tapering its massive stimulus program.
The dollar slumped broadly as U.S. Treasury yields eased from multimonth highs and some investors worried its recent rally may have been overdone. Crude oil fell. Gold rose.
Global shares also fell. In Europe, the FTSE Eurofirst 300 index of top shares has dropped 1.84 percent, giving back the previous day's 1.3 percent gain and then some.
Cyclical shares led Wall Street stocks down as investors continued to question the longevity of the stimulus and worried that less stimulus could lead to less growth.
While markets have focused on improved economic signals in the United States, Europe's economy is a different story.
More From This Section
"The OECD dropped its global growth forecast and pointed out that a QE exit could be very painful," Doug Cote, chief market strategist with ING U.S. Investment Management, referring to quantitative easing, the Fed's bond-buying program.
The Organization for Economic Cooperation and Development (OECD) said the Fed might soon be justified in trimming its purchases of government bonds and mortgage-backed securities, but said the tapering would have to be done in a way that would keep yields from spiking dangerously higher.
The Dow Jones industrial average was down 129.13 points, or 0.84 percent, at 15,280.26. The Standard & Poor's 500 Index was down 13.40 points, or 0.81 percent, at 1,646.66. The Nasdaq Composite Index was down 23.51 points, or 0.67 percent, at 3,465.38.
Some strategists were not alarmed by the selling.
"The stock market is up 18 percent year-to-date and we're not even half-way through the year. In that context, this hardly qualifies as a down day," Cote said.
Fear that the Fed would start to curb the amount of its purchases of Treasuries has cut prices of U.S. Treasuries and propelled yields sharply higher.
Benchmark Treasury note yields hit a peak of 2.235 percent, its highest since April 2012, before easing to 2.16 percent on Wednesday.
Financial markets have seen a rise in volatility since Fed chairman Ben Bernanke last week suggested the central bank could begin to roll back its $85 billion-a-month fund injection.
Some investors are avoiding taking big positions as they weigh the strength of a nascent recovery in the global economy against the withdrawal of stimulus.
In fixed income markets, yields on both safer German and U.S. bonds have risen along with those from riskier sovereign issuers, as nervous investors cut back positions.
Traders said the weakness in equity markets had encouraged investors to buy the yen, which is seen as a safe haven, sending the dollar down 1.4 percent to a low of 100.96 yen.
The fall pushed the greenback 0.56 percent lower against a basket of other major currencies as it slipped further away from a 3-year high of 84.50 hit on May 23.
Japan's Nikkei index also bucked the trend in world equity market, ending 0.1 percent higher. The MSCI's world equity index, which tracks shares in 45 countries, posted a 0.67 percent decline on the day.
Many analysts still believe the growth momentum implied by Tuesday's strong figures for U.S. home prices and consumer confidence should ultimately be good for markets but fear the current volatility could continue for some time.
"We've got the (U.S.) payroll figures next week and then all the way though June the market is going to be very sensitive leading up until the next FOMC (Fed policy) meeting," Michael Gallagher, managing director at IDEAglobal, said.
The dollar fell especially hard against Japan's yen and the Swiss franc, which are seen as safe havens which usually gain when higher-risk assets like equities fall.
"In absence of news, the primary thing that we've been trading off of for the last 48 hours has been U.S. Treasury yields," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management in New York.
The dollar lost 1.5 percent to trade at 100.82 yen, according to Reuters data. Against the Swiss franc, the dollar slid 1.7 percent to 0.9602 franc.
Meanwhile, the euro rose 0.7 percent to $1.2944. Adding to gains in the euro was a bigger-than-expected rise in German inflation.
Gold edged up on Wednesday, taking a cue from broad dollar losses and falling stock markets with residual support from strong Chinese physical buying.
Spot gold was up to $1,390.20 an ounce by 1614 GMT, after falling in the previous session as equity markets were lifted by strong U.S. economic data.
U.S. gold futures for June delivery gained $11.00 to $1,389.90 an ounce. The June contract will expire on Thursday.
(Additional reporting by Angela Moon, Veronica Brown, Wanfeng Zhou; Editing by Nick Zieminski and Andrew Hay)