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 The risk of a faster U.S. policy tightening was high enough to keep
European stocks on the defensive, following earlier falls in many
Asian markets. Euro zone bonds sold off slightly.
Sterling traded near its recent five-year peak of just over $1.70
before the Bank of England releases the minutes of its last policy
meeting. BoE Governor Mark Carney said last week rates might rise
before many were predicting, fuelling expectations for a first UK
rate hike later this year.
The U.S. and British central banks' outlooks diverge from that of
the European Central Bank, which cut all its interest rates earlier
this month, while promising banks more liquidity. The Fed's two-day
meeting ends later on Wednesday and is followed by a news conference
with Yellen.
"Markets have been on a hair trigger going into this FOMC meeting
partly because of the recent changes of tone from the BoE and ECB.
That will mean markets will be reading even more into every word
Yellen says than before," said Aberdeen Asset Management Investment
Manager Luke Bartholomew.
"If the Fed is more hawkish then the message will be one of
divergence from the ECB and the euro will suffer. If the Fed is
neutral or dovish then markets will see them as diverging from the
Bank of England and so sterling will benefit."
The dollar index last stood at 80.613, having climbed 0.2 percent on
Tuesday. Against the yen, the greenback reached a one-week high of
102.31, while the euro retreated from a one-week peak hit on Tuesday
to trade flat at $1.3550.
U.S. consumer prices recorded their fastest rise in more than a year
and it may give the Fed a reason to signal it could bring forward
the date when it might consider hiking rates.
"We had this number yesterday and it's probably too early to say if
it's a trend but certainly... it's sign that pressures are starting
to pick up a bit," said Kenneth Broux, a strategist at Societe
Generale.
The FTSEurofirst 300 index of top European shares was up 0.2 percent
at 1391.10.
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DIVERGING OUTLOOKS
German 10-year Bund yields, the benchmark for euro zone borrowing
costs, rose 1 basis point to 1.42 percent. The yield premium offered
by U.S. Treasuries over Bunds was around its highest since 2005 at
125 bps, highlighting the diverging economic and monetary policy
outlooks.
The ECB's stance has kept yields on top-rated bonds depressed and
pushed investors towards riskier assets aiming to maximise returns.
Cyprus was on the verge of making the fastest comeback to markets of
any bailed-out euro zone country with a new five-year bond on
Wednesday.
The looming Fed meeting sent ripples all over the world, with
emerging market currencies falling on concerns that higher U.S.
yields would make investments in these countries less attractive and
potentially hinder their growth prospects.
The Indonesian rupiah hit a four-month low, while Thailand's baht,
the Malaysian ringgit and the Philipine peso also fell. Emerging
Europe's currencies also held close to multi-month lows to the
dollar.
In other markets, Brent crude held above $113 per barrel as heavy
fighting in Iraq shut the country's biggest refinery and led to the
withdrawal of staff from foreign oil firms.
(Reporting by Marius Zaharia; Editing by Toby Chopra)
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