European shares fell on Tuesday, led lower by miners as copper prices slid on worries over Chinese demand, while the dollar hit its highest in almost two weeks after Federal Reserve officials signalled U.S. interest rates could still rise this year.
The U.S. central bank held policy steady last week, citing risks to global growth. But Atlanta Fed President Dennis Lockhart said on Monday he still expected rates would rise this year while St. Louis Fed chief James Bullard said there was a chance of a hike next month.
By contrast, European Central Bank officials have been stressing monetary policy in the euro zone will remain loose for some time. Governing Council member Ewald Nowotny said on Monday ECB rates would stay low as long as growth did.
This divergence between the policy outlooks of the Fed on the one hand and the ECB and Bank of Japan on the other helped push the dollar to its highest point since Sept. 10 against a basket of currencies .DXY.
The euro EUR= was down 0.2 percent at $1.1162, having hit a high of $1.1459 on Friday. The dollar eased 0.4 percent to 120.03 yen JPY= per dollar but was well above Friday lows.
“As long as the markets continue to calm down, particularly emerging markets, there is definitely a reason to trade the dollar slightly higher, but not too much,” said Commerzbank FX strategist Esther Reichelt in Frankfurt. “Too much dollar strength could worsen the inflation outlook and could lead to the Fed not hiking.”
The pan-European FTSEurofirst 300 stocks index .FTEU3 fell 1.6 percent. An index of mining shares .SXPP dropped 3.8 percent after copper CMCU3 retreated 2.1 percent.
Analysts will pay close attention to Chinese factory activity data due on Wednesday.
“If China manufacturing numbers come in better than expected tomorrow, we could see a rebound in mining stocks for some days, but the sector’s medium-term outlook remains bearish,” Christian Stocker, equity strategist at UniCredit in Munich
German carmaker Volkswagen (VOWG_p.DE), which has admitted cheating vehicle emissions tests, tumbled a further 5.7 percent as the investigation spread to Asia.
Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.5 percent. Chinese shares rose, with the Shanghai Composite .SSEC and the CSI300 index .CSI300 of the largest listed companies in Shanghai and Shenzhen both up about 0.9 percent.
Japanese markets were closed for a holiday.
The prospect of higher U.S. interest rates lifted U.S. financial shares, helping Wall Street to modest gains.
However U.S. index futures ESc1 were last down 0.9 percent, suggesting the S&P 500 .SPX would open lower.
Expectations of a prolonged period of low ECB rates pushed down yields on low-risk euro zone debt. German 10-year Bunds DE10YT=TWEB were yielding 0.66 percent, down 2.3 basis points.
The ECB launched a trillion euro bond buying programme in March, but has failed to sustainably lift the market’s long-term inflation expectations.
“I’m not too convinced that they are signalling they are ready to do something in October but it does support our view that if nothing changes between now and December, the ECB may have to add more stimulus,” said Elwin de Groot, senior market economist at Rabobank.
Oil prices fell as concerns over global growth dented the outlook for demand and as traders took profits from a rise of 3-4 percent on Monday.
Brent crude, the global benchmark, was down 70 cents a barrel at $48.21. Gold XAU= traded at $1,135.60 an ounce, steadying after a 0.5 percent drop on Monday.