Dollar dips, stocks cut losses after Fed minutes

By Chuck Mikolajczak

NEW YORK (Reuters) - Major U.S. stock indexes cut their losses and the dollar hit session lows after minutes from the Fed's July meeting indicated the central bank continues to edge closer to a rate hike even as policymakers expressed broad concerns about lagging inflation and the weak world economy.

Energy shares <.SPNY> were the biggest drag on Wall Street, tumbling 2.1 percent, as U.S. oil prices tumbled towards $40 a barrel on a surprise jump in crude stockpiles.

In another volatile day in Asia, Chinese shares were able to rebound from a sharp drop to end the session higher, Vietnam's benchmark VN Index <.VNI> lost 0.4 percent after the central bank devalued its currency and Japan's Nikkei index <.N225> suffered its biggest fall in more than five weeks.

"The Fed minutes don't rule out a September rate hike, but they are certainly saying they want more evidence on the data. That is basically why we are seeing this rally," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

"The real fear here is China and not so much the Fed, so we could still stay within this trading range."

The minutes also showed some concern about the slower economic growth in China, which some investors interpreted as a sign the Fed will hold off on a rate hike in September.

Economic data showed U.S. consumer prices rose slightly in July and suggested inflation pressures were stabilizing enough to support a rate hike from the Fed this year.

European shares closed lower to extend a recent losing streak over concerns about China's growth and the U.S. inflation data.

The Dow Jones industrial average fell 103.55 points, or 0.59 percent, to 17,407.79, the S&P 500 lost 11.42 points, or 0.54 percent, to 2,085.5 and the Nasdaq Composite dropped 24.10 points, or 0.48 percent, to 5,035.25.

The pan-European FTSEurofirst index of 300 leading shares was 1.9 percent lower. MSCI's all-country world stock index was down 0.8 percent.

The dollar index extended losses after the minutes, touching a session low of 96.386 and was last down 0.7 percent at 96.448.

A rise in rates by the Fed would be the first hike in almost a decade, but rocky emerging markets and a renewed slump in commodity prices that drag on inflation have raised doubts about the timing.

The Shanghai and Shenzhen markets <.SSEC><.CSI300> fell more than 5 percent early on, but both rallied to finish up more than 1.2 percent as the central bank injected more funds into the financial system for a second day.

MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.3 percent while its main index of emerging market shares <.MSCIEF> fell 0.7 percent.

Oil resumed its downward trajectory with U.S. crude down 4.3 percent at $40.80 per barrel. Brent crude lost 3.7 percent to $46.97.

(Reporting by Chuck Mikolajczak; Editing by Nick Zieminski)