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The dollar rose to its highest in more than three months and US Treasury yields rebounded from two-month lows on Wednesday, after a Federal Reserve official said the central bank was close to raising interest rates.
The comments on Tuesday from Atlanta Federal Reserve President Dennis Lockhart, regarded as one of the Federal Open Market Committee's centrist policymakers, put next month back on the table for the first US rate hike in almost a decade.
Solid European corporate earnings, notably from French bank Societe Generale, boosted stocks after Lockhart's comments and a slide in Apple shares soured sentiment the previous day.
The dollar's strength kept gold prices anchored near recent five-year lows, though oil clawed back a small part of the 20% it has lost in the past month.
"The market has been wrong-footed once more by the Federal Reserve," said Kathleen Brooks, research director at FOREX.com.
"A rate hike cometh - time for the market to play catch up."
The dollar index, which measures it against a basket of currencies, rose to 98.218, its highest since April 23.
The greenback was close to multi-year highs against emerging market currencies including the South African rand, Brazilian real and Indonesian rupiah.
The euro fell 0.25% to a two-week low of $1.0847.
DON'T FIGHT BULL MARKET
Investors narrowed the odds on a September US rate hike, with Fed fund futures implying around a 1-in-2 chance, compared with around 1-in-3 after weak wage growth data last week.
Yields on 10-year Treasury notes rose 3 basis points on the day to 2.24%, having hit two-month lows around 2.14% earlier this week.
In stocks, Europe's index of the leading 300 shares was up 0.8% at 1,593 points, Britain's FTSE 100 was up a third of 1% and Germany's DAX up 1%.
France's CAC 40 was also up 1%, led by a 8.5% surge in SocGen shares after the bank reported second-quarter results that beat analysts' forecasts.
A report on Spain's service sector, which showed the fastest pace of growth in three months and strongest hiring in eight years, also boosted investor sentiment in Europe.
Earlier in Asia, Japan's Nikkei rose 0.5% but MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.2%.
In China, the CSI300 index of the largest listed companies in Shanghai and Shenzhen was flat after curbs on short-selling prompted a sizable bounce on Tuesday.
There were also signs Chinese consumers could be taking over from manufacturers as the driving force for growth as the Caixin/Markit survey of services climbed to its highest in 11 months.
Losses on Wall Street on Tuesday had been modest with the Dow ending 0.27% lower, while the S&P 500 eased 0.22% and the Nasdaq 0.19%.
Apple hit its lowest in over six months, apparently in part on worries about demand in China.
US futures pointed to a higher open on Wall Street on Wednesday.
"Rate hikes eventually burst bubbles, but it usually takes at least three. We think it is still too early to fight this bull market," Citi's US equity strategy team said in a note to clients.
In commodity markets, Brent oil rose 1% to $50.46 a barrel and US crude gained 0.8% to $46.12, while gold eased to $1,085 an ounce.
