By Herbert Lash
NEW YORK (Reuters) - World equity markets slid further and the U.S. dollar dropped to its lowest in more than two years against the yen on Friday as concern over a global trade war added to investor uncertainties about rising inflation and the outlook for U.S. interest rates.
President Donald Trump's pledge on Thursday to impose hefty tariffs on steel and aluminum imports raised the prospect of a global trade war that could prove damaging to a healthy U.S. economy that is poised to deliver record corporate earnings.
The rout in risk assets knocked the dollar from multi-week highs as the specter of protectionism spurred fear of retaliation by other nations, which would be negative for the greenback.
Major equity indices in Europe fell more than 2 percent, as they were closed when Trump's tariff proposal was announced, while the Nikkei index fell 2.5 percent in Tokyo and the Hang Seng index fell 1.5 percent in Hong Kong.
Asian steelmakers were hit hard, with South Korea's Posco down 3.3 percent and Japan's Nippon Steel off 3.8 percent. Toyota Motor shares slid 2.4 percent after it said tariffs would substantially raise production costs and the price of cars and trucks sold in America.
Trump's move could herald the tough actions on trade he had promised during the electoral campaign as a way to incentivize companies to just "buy American, hire American," said John Doyle, vice president of dealing and trading at Tempus Inc. in Washington.
"The U.S. dollar may face some scrutiny and as a result struggle to hold on to recent gains," Doyle said. "It is the type of scenario that is unprecedented, thus wild swings may occur as this is digested and analyzed the next few days."
Volatility will continue until investors get some clarity on the path of U.S. interest rates, inflation, global trade policy and the international response, said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
"Investors do not like uncertain outcomes, they just don't," Arone said. "If we could just eliminate some of this noise, there's a really healthy underlying stock market."
MSCI's gauge of stock performance in 47 countries fell 0.59 percent while the pan-European FTSEurofirst 300 index of leading regional shares lost 2.07 percent to close at a preliminary 1,438.01.
ArcelorMittal SA, the world's biggest steelmaker, fell 3.7 percent while euro zone automakers and parts companies fell 2.29 percent.
On Wall Street, the Dow Jones Industrial Average fell 252.85 points, or 1.03 percent, to 24,356.13. The S&P 500 lost 7.59 points, or 0.28 percent, to 2,670.08 and the Nasdaq Composite dropped 1.31 points, or 0.02 percent, to 7,179.25.
The dollar index fell 0.38 percent, with the euro up 0.42 percent to $1.2318. The Japanese yen firmed 0.68 percent versus the greenback at 105.55 per dollar.
The Mexican peso lost 0.22 percent to 18.87, while the Canadian dollar fell 0.35 percent versus the greenback at 1.29.
Canada will retaliate against any U.S. tariffs on steel and aluminum products, officials said on Thursday.
U.S. Treasury yields rose, with the 10-year yield bouncing back from a three-week low as the Bank of Japan's chief hinted at a possible exit from its ultra-easy policies if inflation hits its target in its fiscal 2019.
Benchmark 10-year notes fell 18/32 in price to push its yield up 2.8661 percent.
Oil fell for a third day and traded further below $65 a barrel as rising U.S. inventories, record output and a stronger dollar outweighed high compliance with the supply-cutting deal of the Organization of the Petroleum Exporting Countries.
U.S. crude rose 24 cents to $61.23 per barrel and Brent gained 34 cents to $64.17 per barrel.