European shares dip, dollar steady as Fed meeting nears

Tue Dec 17, 2013 8:28am EST
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By Marc Jones

LONDON (Reuters) - Financial markets were growing nervous on Tuesday ahead of a two-day U.S. Federal Reserve meeting that investors hope will finally clear up when it plans to start winding down its huge stimulus program.

The debate over when the Fed will begin to halt the flow of cheap dollars has dominated trading worldwide for months amid worries it could trigger a turbulent reaction from investors who have become all too used to the support.

A majority of economists polled by Reuters still expect the Fed to wait until March before it starts to scale back its $85-billion-a-month program, but recent data have steadily shortened the odds on a move in January - or even this week.

The dollar .DXY and benchmark government bond yields were in suspended animation as the countdown to Wednesday's Fed decision began, and the so-called VIX 'fear gauge' hovered at its highest level in two months.

Philip Marey, a U.S.-focused economist at Rabobank, said he expected the Fed to wait until the new year to move.

But with the economy picking up and Washington having reached a preliminary budget deal last week, he added that it was likely to be a close call, with inflation probably the only major sticking point.

"The labor market data has been strong over the last couple of months so in that respect the evidence is there to start tapering... But the PCE indicator, which is their main measure of inflation, has fallen to 0.7 which is very low."

With fresh inflation data due at 1330 GMT U.S. futures pointed to a soft start on Wall Street, while in Europe shares were already suffering another difficult day.   Continued...

Electronic information boards display market information at the London Stock Exchange in the City of London January 2, 2013. REUTERS/Paul Hackett