Stocks fall on Fed view; euro climbs for 7th day

By Wanfeng Zhou

NEW YORK (Reuters) - Stock markets worldwide slipped on Wednesday after a budget deal in Washington removed some of the fiscal uncertainty hanging over the U.S. economy, boosting expectations the Federal Reserve may soon start reducing its stimulus.

The euro rose against the dollar for a seventh straight session, helped by higher money market rates and diminishing expectations of imminent easing by the European Central Bank.

In September, Fed Chairman Ben Bernanke cited tight fiscal policy as one concern when the U.S. central bank surprised market participants by keeping the stimulus intact. A budget showdown in Congress ultimately led to a partial government shutdown in October.

The to-and-fro over when the Fed will begin to halt the flow of cheap dollars has dominated trading worldwide for months. A recent run of strong U.S. data and talk from policymakers have bolstered expectations the process will start soon.

"Right now, the market is sort of taking all this in. All eyes are on any tapering in December and while the deal removes some political uncertainties, it makes tapering more possible," said Karyn Cavanaugh, market strategist with ING U.S. Investment Management in New York.

The MSCI world equity index, which tracks shares in 45 countries, was down 0.88 percent.

The Dow Jones industrial average ended down 129.60 points, or 0.81 percent, to 15,843.53. The Standard & Poor's 500 Index dropped 20.40 points, or 1.13 percent, to 1,782.22. The Nasdaq Composite Index lost 56.68 points, or 1.40 percent, to 4,003.81.

The Fed will hold its last policy meeting of the year next week, on December 17-18.

"It certainly does appear that a window of opportunity could be opening up for the Fed to act next week without a sharp market reaction, said CMC Markets strategist Michael Hewson. "The only question remaining is as to whether they will avail themselves of it."

Most Asian share markets lurched lower overnight as investors booked profits on a range of once-crowded positions. European stocks ended down 0.53 percent.

Euro zone countries edged closer to agreeing on a long-awaited plan to close ailing banks and at least partly share the costs involved. The plan would pave the way for a fundamental reform to underpin the euro and the region's banks.

The euro rose 0.2 percent to $1.3783, having hit a six-week high of $1.3810. The dollar lost 0.4 percent against the yen, trading at 102.44 yen. The dollar index, which tracks the U.S. currency against a basket of six major currencies, eased 0.12 percent.

With the euro zone making progress and the European Central Bank looking increasingly inclined to sit on its hands, the euro could well top the $1.3832 high of the year, said Societe Generale FX strategist Alvin Tan.

"I'm afraid this euro squeeze is going to continue," Tan said. "The liquidity conditions are definitely tightening.

U.S. Treasuries prices slipped as investors pared bond holdings before a $21 billion auction of 10-year notes, the second leg of a three-part $64 billion sale of government debt this week.

The benchmark 10-year note fell 14/32 in price to yield 2.848 percent.

According to a Reuters poll on Monday, the Fed will begin trimming its monthly asset purchases in March. But some economists are warming up to the idea that it will do so as early as this month or at the January policy meeting.

Despite the expected tapering, an actual interest rate hike remains a distant prospect. Eurodollar and Fed fund futures have not fully priced in a first rate rise until the end of 2015.

Brent crude oil rose 32 cents to settle at $109.70 a barrel. U.S. crude futures for January delivery settled down $1.07 at $97.44.

U.S. crude oil stocks slumped 10.6 million barrels last week, the biggest draw of the year as refiners churned out distillates in record amounts and gasoline stockpiled, data from the Energy Information Administration showed on Wednesday.

Gold fell from a three-week high to $1,252 an ounce.

Among emerging markets in the spotlight, a rise in tensions in Ukraine pushed the cost of insuring the country's debt toward a four-year high.

Scores of riot police moved against demonstrators during the night, triggering fears among opposition leaders that they would crush a protest over the government's decision to spurn an EU trade deal and move Ukraine further into Russia's orbit.

(Additional reporting by Marc Jones in London; Editing by Nick Zieminski, Leslie Adler and Dan Grebler)