Worries about US inflation, which have intensified since the US Federal Reserve's rate-setting open market committee met on Wednesday, sparked further sharp losses for US stock markets. The Nasdaq Composite fell a further 1.3 per cent after a 2 per cent fall on Thursday, while the Russell 2000 index of smaller companies was down more than 5 per cent for the week.
US government bonds also suffered, bringing the yield on the benchmark 10-year bond to its highest level in four years.
The dollar has lost 7 per cent against the euro, yen and sterling since the start of April - a slide that will in turn intensify worries about inflation in the economy. Traders are concerned about the role a weaker dollar will have in correcting the US current account deficit, which is now about 7 per cent of GDP.
Marc Chandler, economist at Brown Brothers & Harriman in New York, said: "Precisely what officials feared would happen from the large global imbalances is now taking place in reaction to their clumsy attempt to 'fix the problem'. Volatility in the capital markets is rising. Global equities are tumbling."
In Japan, the Nikkei 225 stock average fell 1.5 per cent to 16,601.78, its lowest finish in seven weeks, while in London, the benchmark FTSE-100 index suffered its worst one-day fall in two years, closing 129.9 points, or 2.15 per cent, weaker at 5,912.1. This was a two-month low.
Later the selling also spread to Latin America where the main market indices for Mexico and Brazil fell 1.57 per cent and 1.73 per cent respectively.
Inflation fears have increased sharply since the Fed's open market committee meeting warned that further interest rate rises may yet be necessary. "It opened some eyes," said Brian Williamson, an equity trader at Boston Company Asset Management.
In New York, the dollar ended at $1.293 to the euro and at $1.894 against sterling. Against the yen, it stood at Y110.02. Traders thought a correction was likely.
http://news.yahoo.com/s/ft/20060512/bs_ft/fto051220061929327968
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Colin Brace
Amsterdam