The dollar hit its lowest in almost five months and Asian stocks slipped on Thursday after news that the Federal Reserve lowered its forecasts for U.S. economic growth for the next three years.
Japan's Nikkei average <.N225> fell 0.9 percent as the stronger yen weighed on exporters including Honda Motor Co <7267.T>, with technology shares down after the world's biggest PC maker, Hewlett-Packard
In Europe, financial spreadbetters expected Britain's FTSE 100 <.FTSE> to open as much as 1.3 percent down, and Germany's DAX <.GDAXI> and France's CAC 40 <.FCHI> to start as much as 1.5 percent lower.
The dollar hit its lowest in six months against the pound and nearly five months against a basket of six major currencies <.DXY> after minutes showed Fed policymakers had mulled buying more securities at their last policy meeting in April to spur recovery -- a move which would inject more dollars into the market.
In new quarterly forecasts, the Fed projected the U.S. economy would contract by between 1.3 percent and 2.0 percent this year, with the unemployment rate rising to between 9.2 percent and 9.6 percent.
RECOVERY STILL ON
In January, the Fed had forecast a milder contraction of between 0.5 percent and 1.3 percent, with the jobless rate rising to between 8.5 percent and 8.8 percent.
As long as U.S. equities are not sliding sharply, the tendency in the currency market is to view the global recovery as still on, RBS strategist Alan Ruskin wrote in a client note.
Near-zero U.S. interest rates, reallocation of funds parked in low-yielding U.S. assets to weather the financial crisis and latent concerns about the Fed's securities buying program were all conspiring to weigh on the dollar, Ruskin said.
Taken collectively and despite a poor equity close, the market is still in a mood to buy the risk trade dip, without convincing evidence to do otherwise.
The dollar dipped to a two-month low at 94.28 yen and eased to $1.3770 per euro, after dipping to its lowest since early January at $1.3830 on Wednesday. Sterling jumped to $1.5817, before retreating to $1.5768.
The MSCI index of Asian shares outside Japan <.MIAPJ0000PUS> eased 0.5 percent after hitting its highest in more than seven months on Tuesday.
Chinese shares <.SSEC> sank 1.6 percent as blue chips fell on renewed worries about the strength of China's economic recovery, while Hong Kong <.HSI> fell 0.9 percent. Australia's S&P/ASX 200 index <.AXJO> edged down 0.2 percent.
Shares in Seoul slipped 1 percent <.KS11> after losses on Wall Street due to the gloomier Fed forecasts.
WAITING FOR SIGNS
The Dow Jones industrial average <.DJI> fell 0.62 percent to at 8,422.04, and the Standard & Poor's 500 Index <.SPX> lost 0.51 percent to 903.47, while the Nasdaq <.IXIC> eased 0.39 percent.
We're now at a point where the market's trying to make up its mind whether to go up or down, and for a recovery we need to start seeing signs of improvement in the real economy, said Noritsugu Hirakawa, a strategist at Okasan Securities in Tokyo.
In Japan, technology shares fell in the wake of a drop by their U.S. peers, though Sony Corp <6758.T> pared losses to close down 0.2 percent after saying it plans to halve the number of its parts and materials suppliers.
Among exporters, Canon Inc <7751.T> and Toyota Motor Corp <7203.T> both fell, with investors fretting about the stronger yen, which eats into overseas profits when they are repatriated.
U.S. Treasuries rallied on Wednesday after the release of the minutes from the Fed policy meeting but prices dipped in Asian trade. The benchmark 10-year yield rose nearly 2 basis points to 3.217 percent from late U.S. trade.
Japanese government bond futures also lost ground, ending down 0.17 point at 137.01 after the Nikkei pared its losses.
The Bank of Japan begins a two-day policy board meeting on Thursday. But traders said the event is unlikely to have much impact because the central bank is widely expected to keep its interest rates near zero.
Gold was trading at $941.80 an ounce after rising to an eight-week high above $942 per ounce on Thursday, buoyed by the rally in oil and the dollar's slide.
Oil gave back some gains after rallying to a six-month high, dipping below $62 a barrel after jumping more than 3 percent on Wednesday on news of a deep drop in U.S. crude and gasoline stockpiles.
(Additional reporting by Elaine Lies; Editing by Jan Dahinten)