Wall Street opens down, dollar up as investors mull U.S. rate hikes

By Tom Wilson and Pete Schroeder

LONDON/WASHINGTON (Reuters) -Wall Street opened lower Wednesday while the dollar held near highs as investors bet on earlier Federal Reserve interest rate hikes following strong U.S. retail sales data.

All three major U.S. stock indices opened the trading day lower as the combination of stronger than expected retail sales and rising prices increased the odds the Fed could hike rates sooner than previously expected.

"The good news for investors is that aggregate demand appears to be weathering the surge in inflation so far," wrote Bank of America analysts in a note. "The bad news is that the combination of robust demand and a large supply shock makes a strong case for Fed tightening."

The Dow Jones Industrial Average opened the day down 0.37%, the S&P 500 lost 0.33% and the Nasdaq Composite dipped 0.31%.

The MSCI world equity index, which tracks shares in 45 nations, fell 0.33%.

The dollar rose to its highest against the Japanese yen since March 2017 after U.S. data on Tuesday showed stronger-than-expected retail sales last month.

With inflation running high, the figures boosted expectations of a rate hike as early as mid-2022. Investors also think the data could encourage the Fed to accelerate the tapering of its asset purchase program.

"Ultimately we're in a place where it looks like growth is still pretty strong," said Mike Bell, global market strategist at J.P. Morgan Asset Management. "The Fed is going to taper before they put rates up, and I think that's supporting dollar."

The dollar index - which measures the currency against six rivals - climbed to 96.26, its highest since last July before dipping slightly in early U.S. trading. Its strength weighed on U.S. Treasuries, with benchmark 10-year note yields reaching 1.623% at the opening of U.S. markets. [US/]

Safe-haven gold also got a boost as investors bet on a rate hike. Spot gold prices were last up 0.87% to $1,866.01 an ounce.

$1 TRILLION INFLOWS

Global equities have seen inflows of around $1 trillion during the last 51 weeks as positive news on coronavirus vaccines emerged, Goldman Sachs said in a note, adding this year has already seen four times the inflows of the previous best year.

"The understandable growing attraction of real assets (those that provide some hedge against inflation) is pushing up equity index levels and driving investors to move increasingly away from negatively yielding cash and bonds," the strategists said.

U.S. President Joe Biden and Chinese leader Xi Jinping turned down some of the heat in Sino-U.S. tensions in talks on Tuesday, though both sides held to entrenched positions on a range of issues.

Oil prices slipped after data showed U.S. gasoline inventories fell more than expected last week, heightening pressure on U.S. authorities to release oil from emergency reserves.

Brent crude was last down 0.59% at $81.94 a barrel. U.S. crude was last down 0.89% at $80.04 per barrel.[O/R]

(Reporting by Tom Wilson in London, Alun John in Hong Kong and Pete Schroeder in Washington; Editing by Bernadette Baum and Nick Zieminski)