By Dion Rabouin
NEW YORK (Reuters) - Wall Street stocks fell the most in two weeks on Tuesday, following European and Asian bourses lower after weak U.S. data and comments by an influential Federal Reserve policymaker that the Fed could raise interest rates as early as next month.
New York Fed President William Dudley's statement seemed at odds with data released on Tuesday that showed consumer prices were unchanged in July as the cost of gasoline fell for the first time in five months and underlying inflation slowed.
The New York Fed also released a survey showing business confidence fell and activity in the region’s service sector declined significantly last month.
Generally that would diminish the prospect of rate increases this year, but market participants seemed to believe the man more than the numbers. Fed funds futures prices showed traders raised bets on a rate hike before year-end to just over 50 percent, up from 42 percent on Monday, according to CME Group's Fed Watch.
"I wouldn't be surprised if there was a rate hike in September because the economy in general is doing better than what most people had feared," said Todd Morgan, chairman at Bel Air Investment Advisors in Los Angeles.
Dudley, a permanent voter on rates and a close ally of Fed Chair Janet Yellen, gave the market-moving interview nine days before an annual meeting of top central bankers in Jackson Hole, Wyoming, a venue the Fed often uses to telegraph policy plans.
That weighed on stocks, which respond negatively to monetary policy tightening, particularly as U.S. data appeared unsupportive of a rate rise.
The Dow Jones industrial average fell 78.31 points, or 0.42 percent, to 18,557.74, the S&P 500 lost 9.76 points, or 0.45 percent, to 2,180.39 and the Nasdaq Composite dropped 26.54 points, or 0.5 percent, to 5,235.48.
European shares retreated from seven-week highs, weighed down by industrial stocks, with markets in London, Paris and Frankfurt all closing lower.
Chinese stocks pulled back from seven-month highs following a sharp fall in bank shares, and Japan's Nikkei fell 1.62 percent to its lowest in just over a week as the yen firmed.
A measure of stocks around the globe slipped 0.3 percent.
Dudley's comments also moved U.S. Treasuries, with yields on two-year notes touching a near three-week high of 0.7580 percent, as expectations for a rate hike prompted investors to sell shorter-dated Treasuries.
"The market sell-off is largely due to Dudley. His whole tone was a bit hawkish, which was surprising," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.
The dollar hit its lowest against the yen, the euro and the Swiss franc since June 24, the day after Britain voted to exit the European Union.
The euro rose more than 1 percent against the dollar, while the dollar fell more than 1.5 percent against the yen and more than 1 percent against the Swiss franc. [FRX/]
Analysts attributed the dollar's weakness to comments from San Francisco Fed President John Williams Monday afternoon.
But the dollar recouped some of its losses after Dudley's comments. The dollar index , which measures the greenback against six major rivals, was last down 0.88 percent at 94.791.
"Many still believe the Fed has a chance to hike later in the year," said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago. "Dudley said that later in the day, and that’s what gave us a little bit of a reversal.”
Oil prices reached their highest in more than five weeks in European trading as the market rode optimism over potential producer action to curb output.
Brent crude futures hit their highest point since July 7 and were last up 1.4 percent at $49.03 per barrel. U.S. West Texas Intermediate crude reached its highest since July 15, before easing to $46.45, up 1.6 percent.