Expectations for more Federal Reserve rate hikes are keeping the dollar at multi-decade highs against major peers including the yen and sterling

London (AFP) - European stocks retreated Tuesday as Sweden’s jumbo interest rate hike, aimed at tackling inflation, stoked expectations of more increases this week from the US Federal Reserve and the Bank of England.

The Swedish central bank sprang the biggest rise in three decades, ramping up its rate by a full percentage point to 1.75 percent.

The news sent the region’s markets into reverse as tighter global borrowing costs bear down on economic activity.

Frankfurt and Paris equities also dropped about one percent as news of rocketing German producer prices further fanned inflation fears.

London fell after reopening following funeral of Queen Elizabeth II on Monday.

The euro dipped against main rivals after Monday’s surge, while oil price gains were capped by the stronger dollar.

- ‘Nerves jangling again’ -

“European stocks rallied at the open – but a jumbo rate hike from Sweden’s central bank sent the nerves jangling again as investors worry about what’s in store from global central banks,” Markets.com analyst Neil Wilson told AFP.

The US Federal Reserve is forecast Wednesday to hike its key interest rate by another 0.75 percentage points.

One day later, the Bank of England (BoE) is predicted to deliver another sizeable increase in British borrowing costs.

“The (Swedish) hike underlined just how serious central banks are taking the inflation threat and with 75 basis point hikes from the Bank of England and Federal Reserve looking like slam-dunk certainties, the early optimism in the markets quickly evaporated,” added Wilson

“The reality of central bank tightening… is keeping a lid on stocks and will continue to act as a headwind for risk.”

Asian markets meanwhile enjoyed a much-needed bounce Tuesday, tracking Wall Street’s late rally as investors gird themselves for another big Fed hike, though fears of a recession remain elevated.

The Fed’s decision is the main markets focus after figures last week showed consumer prices are still rising at a pace not seen since the early 1980s.

Some observers have even speculated over a possible one-percentage-point move.

Elsewhere on Tuesday, the British pound remained under pressure, even as the BoE lines up another rate hike, after sliding on Friday to a 1985 low at $1.1351.

- Key figures at around 1100 GMT -

London - FTSE 100: DOWN 0.3 percent at 7,218.59 points

Frankfurt - DAX: DOWN 0.9 percent at 12,694.32

Paris - CAC 40: DOWN 1.0 percent at 6,002.38

EURO STOXX 50: DOWN 0.8 percent at 3,472.62

Tokyo - Nikkei 225: UP 0.4 percent at 27,688.42 (close)

Hong Kong - Hang Seng Index: UP 1.2 percent at 18,781.42 (close)

Shanghai - Composite: UP 0.2 percent at 3,122.41 (close)

New York - Dow: DOWN 0.2 percent at 30,765.98

Euro/dollar: DOWN at $1.0007 from $1.0024 on Monday

Dollar/yen: UP at 143.65 yen from 143.21 yen

Pound/dollar: UP at $1.1435 from $1.1431

Euro/pound: DOWN at 87.51 pence from 87.70 pence

Brent North Sea crude: UP 0.6 percent at $92.58 per barrel

West Texas Intermediate: UP 0.5 percent at $86.19 per barrel

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