* US stock indexes fall 2 pct to 3 pct, turn lower for 2010
* Dollar hits 15-yr low vs yen; gains vs other currencies
* Oil down 2.8 pct; government bonds rally
(Updates with U.S. markets' close)
By Walter Brandimarte
NEW YORK, Aug 11 (Reuters) - Fear roiled global markets on
Wednesday, with stocks sinking and the dollar making its
biggest one-day gain in nearly two years against most
currencies.
Despite the dollar's broad gains, the Japanese yen hit a
15-year high against the greenback as declining yields on U.S.
government debt prompted Japanese funds, heavily invested in
dollar-denominated Treasuries, to repatriate profits.
Commodity prices fell, with oil prices sliding 2.8
percent, on fears that a global economic slowdown led by the
United States and China would reduce demand for raw materials.
U.S. gold futures ended only slightly higher as gold's initial
sharp gains faded during the stock market's steep slide.
The three major U.S. stock indexes ended the session with
losses of 2.5 percent to 3 percent, turning negative once more
for the year so far.
Fears about the sustainability of the global economic
recovery increased after the U.S. Federal Reserve announced on
Tuesday it would use cash from maturing mortgage bonds it
holds to buy more government debt, maintaining the current
level of monetary stimulus. See [].
U.S. Treasury debt prices rallied, with the 10-year note's
yield near 16-month lows, in response to the Fed's expected
re-entry into the bond market and stocks' sharp sell-off.
Some investors saw the measure as a sign that policy-
makers want to support financial markets while the economy
goes through a possible pause in growth. []
"I don't think that we are in for a major correction for
the equity market," said Klaus Wiener, head of research at
Generali Investments in London.
"The Fed is willing to support the economy. If the economy
slows but does not fall into recession as I expect, then
market confidence in the economy could improve again," he
added.
But that strategy, at least for now, seemed to have
backfired.
"If one of the Fed's goals in yesterday's statement was to
instill confidence in the market that they will do anything to
make things better, they accomplished the exact opposite in
that today we are even more worried about economic growth,"
Peter Boockvar, equity strategist at Miller Tabak & Co in New
York, said in a note to clients.
NASDAQ DOWN 2.7 PCT FOR YEAR
Adding to investors' woes was data showing a slowdown in
Chinese investment and factory output growth, coupled with a
Bank of England's downgrade of its growth forecast and a
dovish tone from its governor, Mervyn King.
Chinese annual factory output growth slowed to 13.4
percent last month from 13.7 percent in June ,but beat
forecasts of a 13.2 percent rise. Year-to-date growth in
fixed-asset investments slowed to 24.9 percent from 25.5
percent. []
"If China's economy slows down, industries worldwide will
likely feel it in their revenue. That could darken the jobs
picture in this country even further than it already is," said
Keith Bliss, senior vice president at Cuttone & Co in New
York.
The MSCI All-Country World index <.MIWD00000PUS> fell 2.7
percent, while the FTSEurofirst 300 index <> of top
European shares tumbled 2 percent to end at 1,040.87 -- a
three-week closing low.
Banking and commodity shares led European markets lower,
with the STOXX Europe 600 banking index <.SX7P> falling 3.4
percent.
On Wall Street, the Dow Jones industrial average <>
lost 265.42 points, or 2.49 percent, to end at 10,378.83,
while the Standard & Poor's 500 Index <.SPX> sank 31.59
points, or 2.82 percent, to 1,089.47. The Nasdaq Composite
Index <> tumbled 68.54 points, or 3.01 percent, to close
at 2,208.63.
For the year, the Dow was down 0.5 percent, while the S&P
500 was off 2.3 percent and the Nasdaq was down 2.7 percent.
U.S. Treasuries rallied, with the two-year note's yield
<US2YT=RR> touching a record low of 0.493 percent earlier in
the session.
The benchmark 10-year note <US10YT=RR> shot up 26/32 in
price, with the yield at 2.68 percent, a 16-month low.
"The fall in U.S. yields is a barometer of the cyclical
position of the U.S. economy," said Adam Cole, head of
currency strategy at RBC Capital Markets.
"The market's reaction is that if the U.S. economy is
slowing materially, it will not be in isolation, and it has
therefore responded by selling risk."
DANCE OF THE RISING YEN
The dollar gained against a basket of major currencies as
investors became more averse to risk, with the U.S. Dollar
Index <.DXY> up 2.11 percent, its biggest one-day rise since
October 2008.
The euro <EUR=> was down 2.32 percent at $1.2871.
The greenback was practically flat against the Japanese
yen <JPY=>, however, after touching a 15-year low around 84.72
yen earlier in the session.
Appetite for the yen increased as Treasuries' yield
spreads over Japanese government debt narrowed, prompting the
Japanese Finance Minister Yoshihiko Noda to say he was closely
watching forex markets.
Analysts said, however, his rhetoric was unlikely to
escalate into currency intervention to weaken the yen.
[]
U.S. crude oil <CLc1> fell $2.23, or 2.78 percent, to
settle at $78.02 a barrel. Crude oil futures prices were also
pressured by a government inventory report showing refined
products stockpiles rose more than expected last week, even
though refiners reduced capacity more than 3 percent.
In New York, U.S. gold futures <GCZO> gained $1.20 to
settle at $1,199.20 an ounce, off an intraday high at
$1,210.20.
(Reporting and writing by Walter Brandimarte; Additional
reporting by Chris Reese, Ryan Vlastelica and Steven C.
Johnson; Editing by Jan Paschal)
