Uncertainty about the Federal Reserve's view on the U.S. economy and another sharp fall in Chinese stocks pushed equities lower across the world on Wednesday and drove lower-yielding currencies higher.
The Fed started its two-day meeting on Tuesday, with expectations that it will leave benchmark interest rates near zero and let a $300 billion quantitative easing program to buy Treasury securities expire on schedule in September as economic gloom lifts.
But after a report showing U.S. firms continue to cut inventories as they lack confidence in the economy, analysts expect the Fed will try to dampen speculation about higher interest rates while still supporting hopes that the makings of a recovery are at hand.
Its statement is due at about 2:15 p.m. EDT.
The Bank of England's inflation forecasts, due at 5:30 a.m. EDT, were also in focus after its surprise decision last week to extend its quantitative easing program.
World stocks as measured by MSCI were down 0.6 percent with emerging market equities <.MSCIEF> dropping 1.7 percent.
World share markets have been moving in tandem for a while and there's growing concern that many have been overbought, which may lead to a bit of adjustment after all the gains, said Masayoshi Okamoto, head of dealing at Jujiya Securities in Tokyo.
One area of concern was China, where Shanghai's bourse <.SSEC> dropped 4.7 percent. A similar tumble occurred at the end of July and while Chinese stocks are notoriously volatile, investors are nonetheless jittery about the market.
European shares fell in early trade on Wednesday, extending their losing run to three days. The pan-European FTSEurofirst 300 <.FTEU3> index of top shares was down 0.7 percent.
Earlier, Japan's Nikkei <.N225> closed down 1.4 percent.
Falling Chinese stocks dented demand for riskier currencies and prompted investors to cut long positions in higher-yielding currencies such as the Australian dollar.
Uncertainty about the overall market reaction to the Fed's policy decision was also making investors cautious.
The currency reaction after the Fed is hard to predict. But one thing that is certain is that long positions that had been stretched are now looking vulnerable to liquidation, said Shuichi Kanehira, head of FX spot trading at Mizuho Corporate Bank.
The dollar fell 0.7 percent to 95.21 yen, but the U.S. currency was otherwise higher. The euro lost a third of a percent to $1.4100.
Euro zone government bonds were higher as equities came under pressure. Two-year euro zone government bond yields were 5 basis points lower at 1.426 percent, with 10-year yields off 4 basis points at 3.432 percent.
(Editing by Mike Peacock)