By Tom Finn
LONDON (Reuters) - World stocks fell and the dollar strengthened on Wednesday due to fears of an imminent escalation in the U.S.-China tariff war, although strong corporate earnings eased investor concerns about a recent sell-off in the tech sector.
Solid earnings and better-than-expected economic data looked poised to lift European shares on Wednesday but the Stoxx 600 declined, dragged down by autos and miners, as tensions over trade rose again between the world's two largest economies.
The United States is reportedly considering more than doubling its planned tariffs on $200 billion of Chinese imports to pressure Beijing into making trade concessions.
This came just hours after European stocks were cheered by a report that the United States and China were seeking to resume trade talks to defuse a battle over import tariffs.
Renewed concern about what a full-blown conflict would mean for China and the global economy weighed on Chinese shares, the offshore yuan and the Australian dollar.
Wednesday's reaction remained fairly muted, however, as investors turned their attention to central bank decisions.
"Maybe the market is underestimating the economic impacts of the tariffs and that is why it is keeping calm," said Thu Lan Nguyen, a currencies strategist at Commerzbank (DE:CBKG) in Frankfurt.
The U.S. Federal Reserve concludes its policy meeting on Wednesday and markets are preparing for the Fed policy statement for signs of whether the expected two rate hikes for the remainder of 2018 can be cemented into pricing.
"Buying sentiment towards the dollar could receive a boost if the central bank strikes a hawkish tone," Lukman Otunuga, research analyst at FXTM, wrote in a note.
At 1130 GMT, the dollar index, which tracks the greenback against a basket of six major rivals, was up 0.1 percent at 94.570.
APPLE SUPPORT
Stronger than expected earnings by Apple Inc (NASDAQ:AAPL) pushed quarterly results beyond Wall Street targets on Tuesday, allaying some concerns about a tech sector shaken by recent sell-offs in Facebook Inc (NASDAQ:FB), Twitter Inc (NYSE:TWTR) and Netflix Inc (NASDAQ:NFLX).
The tech retreat has overshadowed a generally buoyant U.S. earnings season, with average 22.6 percent profit growth and 83 percent of companies beating consensus estimates so far.
World stocks in July recorded their best monthly returns since January, despite trade tensions, growth fears and tech selling.
European shares were down across the board as worries about the U.S.-China trade conflict undermined a fresh batch of positive corporate earnings.
The pan-European STOXX 600 fell 0.4 percent while Germany's DAX slipped 0.3 percent. Britain's FTSE 100 tumbled 1.3 percent and France's CAC 40 fell 0.1 percent.
Investors fear a trade war between Washington and Beijing could hit global growth, and prominent U.S. business groups have condemned Trump's aggressive tariffs.
YEN DOWN
The yen continued to depreciate, falling 0.2 percent versus the dollar to 112.13 as Tuesday's pledge by the Bank of Japan to keep rates extremely low for an extended period continued to weigh on the Japanese currency.
BOJ's policy announcement on Tuesday to make its massive stimulus programme more flexible provided some comfort to bond investors.
Traders appeared to be putting the BOJ's tolerance for higher yields to the test on Wednesday as the benchmark 10-year Japanese government bond yield rose to 0.12 percent in its biggest one-day rise in two years.
"Since the BOJ was vague about what its flexibility means, the market wants to test the bank's pain threshold," said Jan von Gerich, chief analyst at Nordea in Helsinki.
In Britain, a 25 basis-point hike is now widely expected on Thursday when the Bank of England meets, despite economic weakness linked to Britain's looming European Union exit.
The pound held at $1.3138, rising away from a more than 10-month trough of $1.2955 touched earlier in July.
In commodities, oil prices fell on industry data showing an unexpected rise in U.S. crude stockpiles. The slump in crude prices comes after their largest monthly decline in two years in July.
U.S. crude dipped 0.8 percent to $67.98 a barrel, while Brent gave up 1.4 percent to $73.2 per barrel.
Spot gold fell 0.1 percent to $1,222.99 per ounce.