* Worries about extent of QE dominate
* Dollar rises as Japan warns about intervention
* Stocks weak, Wall Street set for losses
By Jeremy Gaunt, European Investment Correspondent
LONDON, Oct 26 (Reuters) - Second thoughts about the outcome
of the next Federal Reserve meeting weakened stocks and steadied
the dollar's decline on Tuesday, underlining how crucial the
prospect of more Fed asset-buying has become to financial
markets.
Wall Street looked set to open lower.
MSCI's all-country world stock index <.MIWD00000PUS> was
down a third of a percent with its emerging market sub-index
<.MSCIEF> sustaining a small loss.
The dollar was up nearly 0.2 percent against a basket of
major currencies <.DXY>.
After no major policy initiatives emerged from the Group of
20 finance ministers' meeting over the weekend, investors had
renewed selling the dollar, expecting it to fall with the advent
of more quantitative easing (QE) from the Fed.
QE essentially involves printing more money, so a flood of
dollars on the market would debase the currency's value.
But some investors have begun worrying that the market
consensus for a big burst of QE may be overdone. This has been
backed up by comments from some Fed officials.
Kansas City Fed President Thomas Hoenig called more asset
buys by the central bank a "very dangerous gamble". New York Fed
President William Dudley said the U.S. economic context would
determine whether an incremental or big bang approach to asset
purchases was better.
"The dollar is in a bit of a holding pattern. The market is
still mulling over the U.S. QE story and dollar selling is a bit
less of a one-way bet than it was," said Jeremy Stretch,
currency strategist at CIBC.
The dollar also rose around 0.4 percent against the yen
<JPY=> to 81.09 yen after Japanese Finance Minister Yoshihiko
Noda said Japan would take decisive steps on the exchange rate
when needed, a not-too-subtle reminder about intervention.
The euro lost a quarter of a percent to fall below $1.40
<EUR=>.
Meanwhile, the prospect of more QE from the Bank of England
was also called into question by data showing the UK economy
grew 0.8 percent in the third quarter, bringing year-on-year
growth to 2.8 percent -- the fastest annual rate in three years.
HEADWINDS FOR STOCKS
European equities fell on both uncertainty about QE and
comments from ArcelorMittal <ISPA.AS> that the basic resources
sector faced extended weakness.
"We had a rally since August and now people are waiting to
see whether this quantitative easing is going to come through or
not. There are still some uncertainties and the market is going
to be range-bound until the meeting of the Fed," said Koen De
Leus, strategist at KBC Securities, in Brussels.
The Fed meets next on Nov. 2-3.
ArcelorMittal, the world's largest steelmaker, predicted a
far weaker-than-expected fourth quarter due to muted demand,
lower prices and higher raw material costs.
The overall result was to drag the FTSEurofirst 300 <>
down 0.4 percent.
Earlier, Japan's Nikkei <> closed down 0.3 percent,
with exporters still in focus because of the strong yen.
U.S. stock index futures pointed to a lower open on Wall
Street with Texas Instruments Inc <TXN.N> in focus after it
warned, despite expectation-beating earnings, that its
fourth-quarter revenue will be hurt by slowing demand for chips
for computers and televisions.
(Additional reporting by Jessica Mortimer and Atul Prakash;
Editing by Ruth Pitchford)
