Stocks, dollar reverse to risk-off mode after U.S. inflation data is higher than expected

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By Sinéad Carew

NEW YORK (Reuters) - The dollar index reversed course to rally sharply and U.S. stocks sank while Treasury yields climbed after data showed U.S. consumer prices rising faster than expected in August, prompting bets for more aggressive Federal Reserve rate hikes.

Oil futures give up earlier gains in choppy trading after declining gasoline prices in August were offset by gains in rent and food costs. The Consumer Price Index gained 0.1% last month versus expectations for a 0.1% decline and after being unchanged in July, the Labor Department said on Tuesday.

U.S. stock indexes had rallied on Monday and also gained ground last week as investors were betting that Tuesday's data would show some dampening in inflation. [.N]

"With the rally over the last week and yesterday, the market's risk reward coming into this report was a little skewed to the downside anyway even if we did get a report that was in-line or slightly below expectations. This report was a negative surprise with hotter inflation," said Mona Mahajan, senior investment strategist at Edward Jones.

"This was another disappointment. It's the old Charlie Brown analogy. Every time we're ready to kick the ball it's moved away from us."

The Dow Jones Industrial Average fell 718.06 points, or 2.22%, to 31,663.28, the S&P 500 lost 103.91 points, or 2.53%, to 4,006.5 and the Nasdaq Composite dropped 389.45 points, or 3.17%, to 11,876.96.

The pan-European STOXX 600 index lost 1.02% and MSCI's gauge of stocks across the globe shed 2.00%.

In currencies the dollar index rose 0.97%, with the euro down 0.85% to $1.0033.

The Japanese yen weakened 0.84% versus the greenback at 144.05 per dollar, while Sterling was last trading at $1.1563, down 0.99% on the day. The Mexican peso lost 0.94% versus the U.S. dollar at 20.03.

U.S. Treasury yields rose and the inversion of a closely watched part of the yield curve widened after the inflation data also bucked bond investor expectations.

Benchmark 10-year notes last fell 19/32 in price to yield 3.4351%, from 3.362% late on Monday. The 30-year bond last fell 24/32 in price to yield 3.5558%, from 3.513%. The 2-year note last fell 10/32 in price to yield 3.7371%, from 3.571%.

The gap between yields on two- and 10-year notes, seen as a recession harbinger, was at -27.3 basis points. [US/]

Oil prices were lower after the inflation data implied more hefty rate hikes from the Fed and renewed COVID-19 curbs China, the world's second-largest oil consumer, also weighed on crude prices.

Spot gold dropped 1.1% to $1,704.50 an ounce. U.S. gold futures fell 1.37% to $1,704.50 an ounce.

In precious metals, gold prices fell more than 1% as the dollar jumped after an unexpected rise in monthly consumer prices that could support the case for aggressive rate hikes from the Federal Reserve.

Spot gold dropped 1.1% to $1,704.50 an ounce. U.S. gold futures fell 1.37% to $1,704.50 an ounce.