European stocks fell and Wall Street was set for a weaker start on Wednesday as investors turned cautious after economic optimism pushed world stocks to fresh 7-1/2 month highs and sterling to 2009 peaks earlier.
The dollar rose against European currencies after officials told Reuters Asia's richest central banks would shrug off losses from a possible U.S. sovereign credit rating downgrade and continue to buy Treasuries to keep markets stable.
Expectations the worst may be over for the world economy grew after a survey showing improvement in the euro zone and UK service sector and data showing surprise first-quarter growth in Australia.
However, investors are reluctant to push the risk asset rally further before getting more solid evidence of an economic turnaround. A private-sector survey on U.S. employment and factory orders data later will provide more pointers.
Return to growth ... is good but the question is how sustainable it is going to be, how rapidly the economy is going to grow from here, said Peter Dixon, UK economist at Commerzbank.
The data today did not give us any insight how far and quickly we are going to grow. There are still a huge number of structural issues in the economy which might prevent growth from picking up. MSCI world equity index <.MIWD00000PUS> fell 0.4 percent rose having risen as high as 255.16, its highest since mid-October. The index has risen 12 out of past 13 weeks and is now up around 12 percent this year.
The FTSEurofirst 300 index <.FTEU3> fell 1.1 percent while emerging stocks <.MSCIEF> were steady on the day.
U.S. stock futures fell around half a percent, pointing to a weaker open on Wall Street later.
We believe the downside and upside risks to equities are now quite symmetrical and believe strongly that the lows have been seen, Credit Suisse said in a note to clients.
The upside risk to equities is further aggressive quantitative easing. We believe we are in a range trading market like the 1970s.
U.S. crude oil fell 1 percent to $67.81 a barrel.
The euro zone purchasing managers index was revised higher to 44.8 in May from a flash estimate of 44.7, and 43.8 in April. In the UK, the services sector staged a surprise return to growth last month with the PMI index rising to 51.7 from 48.7.
FAITH IN DOLLAR
The dollar rose against European currencies after sources told Reuters a U.S. ratings cut would not cause China, Japan, India and South Korea to change their reserve policies, at least in part because there are no alternatives to the liquidity afforded by the dollar.
The dollar <.DXY> was up 0.5 percent against a basket of major currencies, having been under pressure in recent weeks.
Earlier, sterling hit seven-month highs of $1.6664 and 160.40 yen. It rose to a six-month high of 85.77 pence per euro. On a trade-weighted basis, it hit a 2009 high of 83.4.
The low-yielding yen fell 0.3 percent to 95.95 per dollar. The Australian dollar hit an eight-month high $0.8265, its highest since late September.
The June Bund future rose 77 ticks, supported by a retreat in stocks.
The yield on benchmark 10-year Japanese government bonds rose to 1.550 percent, its highest in more than seven months. Government bond yields around the world have been rising in recent sessions because of worries over mounting debt in Western governments.
(Additional reporting by Dominic Lau; editing by Chris Pizzey)