LONDON (Reuters) - World shares edged lower and the dollar fell on Thursday as uncertainty over when U.S. Federal Reserve will begin cutting its monetary stimulus offset a brighter economic picture in Europe.
Markets have largely positioned for the Fed to start paring its monthly $85 billion spending on bonds in September but unclear signals from policymakers and muted inflation data have undermined this conviction.
Late on Wednesday, the St. Louis Fed President James Bullard cited the inflation outlook when he said he hadn't made up his mind on whether next month's policy meeting would be too soon to curb the asset purchases, known as quantitative easing or QE.
"Markets were absolutely convinced we would see about a 20 percent reduction in the run rate of QE in the September meeting," said Mike Ingram, market commentator at BGC.
In response to Bullard's comments and a weak reading for U.S. producer price inflation, the dollar at one point on Thursday tumbled about 0.5 percent against the Japanese currency to a low of 97.63 yen. It later settled at 97.90 yen, down 0.25 percent.
The greenback's fall was exacerbated by Japanese government efforts to stamp out talk of corporate tax cuts which might have helped boost the world's No. 3 economy.
Against a basket of major currencies, the dollar .DXY was down 0.25 percent, although was off its lows of last week.
An early end to the Fed's bond buying is expected to boost U.S. Treasury yields, which supports demand for the dollar, but would hurt shares and commodities which have been boosted as world central banks have primed markets with liquidity.
The MSCI world equity index .MIWD00000PUS was down 0.2 percent and on course for its worst week in nearly two months after Bullard's comments sparked a selloff in the Dow on Wednesday and led to weakness across Asia.
The Dow industrials index .DJI fell 0.73 percent on Wednesday, it's the worst day since June, and stock index futures .DJc1 signaled further falls when Wall Street reopens.
Signs of recovery in Europe and strengthening growth in Britain still underpin the region's equity markets although investors are becoming increasingly wary over the implications for future central bank policy.
German government bond yields hovered around 2013 highs on Thursday after money market rates moved higher following data that showed the euro zone economy had emerged from an 18-month-long recession in the second quarter.
With much of Europe was closed for public holidays. 10-year German yields were holding at 1.81 percent, heading back towards levels not seen since April 2012.
British government bond prices fell sharply and the pound hit a two-month high against the dollar as strong retail sales added to a string of recent data that have pointed to an economic recovery gathering steam.
Sterling rose to $1.5589 after the data while September gilt futures extended their losses sharply to be down 16 ticks down at 109.73. Britain's main share index, the FTSE 100 .FTSE slipped by 0.4 percent.
In commodity markets, supply worries linked to the growing violence in Egypt and the brighter global growth outlook pushed oil prices higher and kept copper near a nine-week high.
A state of emergency was declared by the Egyptian government on Wednesday following deadly clashes between riot police and supporters of ousted President Mohamed Mursi. Investors fear the political turmoil could choke off routes such as the Suez Canal or spill over into big oil-producing nations.
"Egypt may not be a major oil producer but the Suez Canal is an important gateway, not just for oil flows but also for commodities," said Carl Larry, president of Houston-based consultancy Oil Outlook and Opinions. "If there is any disruption or if the violence results in the shutting down of the canal, the impact will be quite severe."
Copper was little changed $7,323 a metric ton (1.1023 tons), while gold stood near a 3-week high 1,337.69 an ounce.
(Editing by Catherine Evans)