The euro fell on Wednesday as doubts set in over whether fresh lending by the European Central Bank would be used to buy struggling euro zone debt, while weak earnings from Oracle weighed on technology stocks and dragged Wall Street lower.
Global shares drifted towards break-even for the day, holding on to strong gains from the previous session, though volumes were thin as the year-end holidays approach.
Italian and Spanish government bond yields rose, snapping an eight-session down trend, while prices of German Bunds edged up.
Initial optimism about ECB lending to euro zone banks gave way to concerns that the flood of liquidity only highlighted the scale of the pressure European banks are under.
The ECB lent 489 billion euros to banks to ease the inter-bank credit crunch and tempt banks to buy higher-yielding Italian and Spanish debt, but optimism that the funding would ease Europe's two-year-old debt crisis quickly faded.
An Italian industry group said banks would not increase their exposure to sovereign debt even after the ECB offering because European Bank Authority rules discourage it. "The key question remains what the banks will do with the newly acquired funds," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
"We suspect that to the extent banks buy sovereign bonds, they will purchase their own sovereign's bonds rather than their neighbor's."
Shares of Oracle Corp , the world's No. 3 software maker, fell 13.1% after it missed Wall Street's forecasts for the first time in a decade.
Stock in its German peer SAP fell 6.1% making it the worst performing blue chip in Europe.
"It is certainly a concern, Oracle is a bellwether in the sector but some of the other stocks in the group may be overreacting," said Brian Lazorishak, portfolio manager at Chase Investment Counsel in Charlottesville, Virginia.
In afternoon trading in New York, the Dow Jones industrial average fell 26.56 points, or 0.22%, to 12,077.02. The S&P 500 Index dipped 1.53 points, or 0.12%, to 1,239.77. The Nasdaq Composite lost 38.89 points, or 1.49%, to 2,564.84.
Global stocks as measured by MSCI were flat a day after posting their largest gains since November 30, while the European benchmark FTSEurofirst 300 closed 0.47% lower. US dollar-denominated Nikkei futures fell 0.4%.
Global equity markets and the euro have traded off European headlines for months as Europe's escalating sovereign debt crisis threatens to take down the region's economy.
Euro gives up rally
The euro fell against the US dollar after the larger-than-expected bank demand for ECB loans failed to convince investors the move would ease Europe's deep-seated debt problems.
The euro initially rose nearly 1% on the day to a one-week high near USD 1.32 before giving up gains to trade around USD 1.3040, down 0.3%.
"While the ECB had hoped that banks borrowing at low rates would buy sovereign debt, it appears they are using the perceived bullish opportunity to jettison risk," said Christopher Vecchio, currency analyst at DailyFX.com.
The benchmark 10-year US Treasury note was down 4/32, yielding 1.9389%, up from 1.927% Tuesday.
Italian bond yields were 18 basis points higher at 6.817%, with Spanish yields 19 basis points higher at 5.313%, after both had fallen almost 100 basis points in the last week and a half.
Italian data showed the economy contracted by 0.2% in the third quarter compared with the previous three months while British consumer morale hit an almost three-year low in December.
US crude futures rose 1.6% to USD 98.80 per barrel after government data showed inventories fell to their lowest level since the late 2008.
