(Updates, adds Wall Street outlook)
By Jeremy Gaunt, European Investment Correspondent
LONDON, June 4 (Reuters) - Prospects of a stronger dollar
threatening the commodities boom and worries about the global
financial sector sent European equities sharply lower on
Wednesday and set Wall Street up for a poor start.
Tokyo stocks, however, were boosted by a weaker yen. Oil was
consistent with the idea of easing commodity prices, falling
below $124 a barrel, more than 8 percent below its peak two
weeks ago.
The catalyst for many market moves remained Federal Reserve
Chairman Ben Bernanke's unusually explicit warning on Tuesday
about the inflationary threat from a weak U.S. currency.
It was widely taken as a signal that the Fed was done with
its rate-cutting cycle and boosted the dollar, which is now up
more than 2 percent in a week against a basket of currencies
<.DXY>.
Commodity markets have surged over the past 12 months as
investors sought protection from the twin risks of inflation and
a declining dollar by piling into everything from oil and gold
to rice and copper. That long commodities-short dollar trading
strategy may be about to unwind.
In Europe, where many share indexes are linked to
commodities through mining and oil companies, stocks took a hit.
The pan-European FTSEurofirst 300 <> was down 1.7 percent.
There were also deep concerns about the state of the
financial sector focused on the possibility that Lehman Brothers
<LEH.N> may need to raise more capital.
"The dollar actually rules the roost today," said Howard
Wheeldon, a senior strategist at BGC Partners. "We are reminded
that the dollar isn't just about oil, it has a significant
affect on all commodities.
"The theme out there is very, very depressing. Good news is
in very short supply (and) we've got to sit this one out for
some while yet."
The story was different in Japan, however, where stocks
jumped, led by exporters who would benefit from a weaker yen.
Japan is also highly dependent on imported oil.
"Oil is settled and the dollar is strong, and the impact of
that is significant," said Hiroaki Osakabe, a fund manager at
Chibagin Asset Management.
The benchmark Nikkei <> gained 1.6 percent, or 226.40
points, to 14,435.57 and the broader Topix <> rose 1.6
percent to 1,430.47.
DOLLAR STEADY BOUNCE
The dollar was broadly steady against a basket of six major
currencies, down 0.1 percent after hefty gains the day before on
Bernanke's comments.
The euro was up slightly at $1.5471 <EUR=> after sliding 1.4
percent from Tuesday's peak. The euro has retreated some 3.5
percent from record highs of $1.6018 hit in April, according to
Reuters data.
The dollar eased 0.4 percent against the broadly stronger
yen to 104.61 yen <JPY=>. The dollar has gained about 1.5
percent over the past two weeks against the yen.
Two-year euro zone government bond yields <EU2YT=RR> were 6
basis points lower at 4.3327 percent, while 10-year yields
<EU10YT=RR> were down 4 basis points at 4.400 percent.
(Additional reporting by Michael Taylor; editing by Stephen
Nisbet)
