US rate fears topple European shares

Worries that the US Federal Reserve will soon be forced to raise interest rates sent financial markets slumping in the US and Europe yesterday.

On the foreign exchanges the dollar took a pounding while Wall Street fell more than 200 points to below the 11,000 level. In London the FTSE 100 shed almost 180 points to 6117.5, hit by general jitters and a gloomy statement from Glaxo.

Continental bourses also showed falls running into three figures with the Paris CAC 40 off 122.3 points to 4306.4 and the Frankfurt XetraDax down 177.24 points at 5052.3.

The latest bout of nerves was triggered by higher-than-expected US pay rises in the second quarter which prompted analysts to predict a rise in interest rates. Fed chairman Alan Greenspan said last week that the US central bank would take prompt action if signs of inflationary pressures appeared.

Although yesterday also saw the release of figures showing slower-than-expected growth in the economy, it was the pay data that spooked Wall Street. The employment cost index, a broad measure of wage and benefit costs, had risen by 1.1% in the second quarter. This was the highest increase for eight years and compared with 0.4% in the previous three months.

"Before these numbers the market was split 50-50 on whether the Fed would raise rates again in August. Now it's 99-1 that it will," said Ian Shepherdson, an analyst at High Frequency Economics.

The Fed lifted rates by 25 basis points earlier this month but Mr Greenspan's congressional testimony left the markets watching for signs that could trigger another rise.

Wall Street's dip sent the dollar down to 1.0740 against the euro at one point, its lowest level against the single currency since May. The pound took advantage of the dollar's weakness to climb more than a cent to $1.6130.