World stocks retrench as Fed spurs rate hike talk

London: World stock markets paused Tuesday and the dollar strengthened as Federal Reserve chief Janet Yellen appeared to lean towards an early rate rise, analysts said.

In semi-annual testimony to Congress, Yellen said question marks over the Donald Trump administration's fiscal policy added uncertainty to the outlook, and cautioned against budget-busting stimulus measures.

But she also said the US central bank will decide at its upcoming monetary policy meetings -- the next one is March 14-15 -- whether to raise the key interest rate once inflation rises closer to the Fed's two per cent target and as employment continues to strengthen

"A tone from Janet Yellen suggesting a little more eagerness to get on with normalising interest rates sent the US dollar to fresh highs for the day," said Jasper Lawler, Senior Market Analyst at London Capital Group.

Wall Street reversed an early slightly weaker trend to trade a tad higher approaching midday in New York.       

Yellen's remarks "just about kept the possibility of a March rate hike alive, but we still think the Fed is unlikely to resume tightening before June", said Oliver Jones at Capital Economics.

But after that, any fiscal stimulus coming from the the Trump White House "would probably force the Fed to tighten policy aggressively", he said.

Eurozone key markets Frankfurt and Paris also eked out tiny late gains as investors balanced resilient eurozone economic growth data against tumbling German investor confidence.

The EU's Eurostat statistics agency revised down eurozone gross domestic product (GDP) growth to 0.4 per cent from 0.5 per cent for the fourth quarter of 2016.

The figures showed however that Europe's recovery remains in place despite the uncertainties arising from Brexit and Trump's administration.

A key ZEW institute survey showed that German investor confidence fell sharply in February.

"Disappointing GDP and ZEW economic sentiment readings ... affected the eurozone indices, the DAX and CAC both struggling to build on Monday's levels," noted Spreadex analyst Connor Campbell.

At the same time, official data showed that Germany's economy rounded off 2016 with strong growth at 0.4 per cent in the fourth quarter -- but that dashed expectations of 0.5 per cent.

London turned slightly negative towards the close of business, weighed down by disappointing results from British engine maker Rolls-Royce.

The group slumped into a record  £4.0-billion ($5.0 billion, 4.8 billion euros) annual net loss, rocked by a Brexit-fuelled collapse in the pound and a corruption fine.

The company's shares closed 3.9 per cent down at 712 pence, having earlier plunged as far as 694.

Peugeot SA shares rose 4.1 per cent in Paris after the company said it was exploring a possible takeover of General Motors' loss-making European assets Opel and Vauxhall.

Japan's Toshiba slumped eight percent after it delayed releasing financial results expected to include billions of dollars in losses from its ailing US nuclear power unit.

The industrial giant warned it was on track to book a $6.2-billion (5.8-billion-euro) writedown in its US nuclear power business, prompting chairman Shigenori Shiga to resign as it hinted at a fresh accounting scandal.