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 Federal Reserve policymakers that the Fed could raise interest rates as early as next month.
New York Fed President William Dudley and Atlanta Fed chief Dennis Lockhart both said in public statements that the U.S. central bank could raise the nation's short-term interest rates at its September policy meeting.
Fed funds futures prices showed traders raised bets on a rate hike before year-end after the comments, with odds rising to just over 50 percent, up from 42 percent on Monday, according to CME Group's Fed Watch.
"The Fed wants to telegraph that it is in the process of normalizing rates and the market is underpricing a rate hike for this year," said Mike Lorizio, head of Treasuries trading at John Hancock Asset Management in Boston.
Dudley and Lockhart's comments came 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.
U.S. consumer prices were unchanged in July as the cost of gasoline fell for the first time in five months and underlying inflation slowed.
The underwhelming inflation report followed a soft July retail sales report last week that cast doubts on the upward momentum of the economy.
The Dow Jones industrial average fell 84.03 points, or 0.45 percent, to 18,552.02, the S&P 500 lost 12 points, or 0.55 percent, to 2,178.15 and the Nasdaq Composite dropped 34.90 points, or 0.66 percent, to 5,227.11.
All three indexes touched record highs on Monday.
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 0.44 percent.
The Fed officials' comments also moved U.S. Treasuries and the dollar, 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 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/]
But the dollar recouped some of its losses in early trading after Dudley's comments. The dollar index , which measures the greenback against six major rivals, was last down 0.89 percent at 94.781.
"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 as the market rode optimism over potential producer action to curb output.
A weaker dollar also supported crude prices, as did the loss of more than 700,000 barrels per day in Nigerian output lost to militant attacks and pipeline problems.
Crude futures hit their highest point since July 7, rising around 2 percent. Brent crude prices were last up 1.92 percent at $49.28 per barrel. U.S. West Texas Intermediate crude reached its highest since July 15, gaining 2.06 percent to $46.68.
(Reporting by Dion Rabouin; Additional reporting by Sam Forgione and Richard Leong in New York; Yashaswini Swamynathan in Bengaluru and Dhara Ranasinghe in London; Editing by Dan Grebler)