Wednesday 21.15 BST: US government bonds came under heavy selling pressure after Ben Bernanke, the chairman of the Federal Reserve, said the central bank could begin scaling back its $85bn-a-month asset purchase programme later this year, if the economy continues to improve.

The yield on the 10-year Treasury bond jumped 17 basis points to 2.36 per cent, the highest since April of last year, while the 30-year yield was 7bp higher at 3.41 per cent. That helped push the dollar sharply higher, while US equities and the gold price came under pressure.

“Bottom line – no backing down, no turning back, the Fed will taper unless the data deteriorate,” said Kit Juckes, currency strategist at Société Générale.

In a news conference following a two-day meeting of the Fed’s Open Market Committee, Mr Bernanke said the Fed’s bond purchases could halt completely by mid-2014, when the unemployment rate is expected to be down to 7.0 per cent.

“In addition, the Fed’s new forecasts also suggest that the first rate hike could come earlier in 2015 than previously thought,” said Paul Ashworth at Capital Economics.

The dollar reversed moderate early losses against the yen and the euro. The US currency rose 1.6 per cent to Y96.84 while the euro was down 0.9 per cent at $1.3270.

“The dollar is acting as might be expected in response to higher actual and projected yields but in the opposite manner to which it has done so during the past two weeks when investors around the world panicked at the prospect of the onset of tapering,” said Andrew Wilkinson, chief economic strategist at Miller Tabak.

“The worry for domestic equity markets now is whether the dollar’s strength supported by the reaction in the yield curve will cause resumption and escalation of selling in overseas equity markets.”

Indeed, as the S&P 500 equity index closed 1.4 per cent lower, having stood 0.1 per cent lower before the Fed statement, Brazil’s Bovespa index tumbled 3.1 per cent.

Gold reversed an earlier advance to stand $17 lower at $1,350 an ounce.

In industrial commodities, Brent oil edged up 10 cents to settle at $106.12, while copper touched a fresh six-week low in London of $6,925 a tonne before paring its decline to end at $6,960.

Before the Fed announcement, European equity markets had seen tense, rangebound trading.

The FTSE Eurofirst 300 index ended 0.3 per cent lower, with the London and Frankfurt markets suffering similar-sized falls.

But there was a more positive mood in Tokyo, where the Nikkei 225 rose 1.8 per cent to its highest level for a week – helped by some robust Japanese trade data. In Shanghai, however, the Composite index closed at its lowest for six months.

Caution was also evident in Europe’s government bond markets, with the German Bund price rising for the first day in three – nudging its yield down 1bp to 1.56 per cent – and peripheral eurozone yields also edging slightly lower.

Sterling extended early losses against the dollar, which came after the release of the minutes of the last meeting of the Bank of England’s Monetary Policy Committee.

“No real surprises in the June MPC minutes with Sir Mervyn King bowing out from the MPC in the minority as he was once again one of three members favouring more quantitative easing in June,” said Howard Archer, chief UK economist at IHS Global Insight.

“However, there was little evidence that any of the other six MPC members were close to changing their mind. We now move to the Carney era at the Bank of England, and he will no doubt be relieved to see the economy looking a bit perkier as he takes up the reins. We believe it is unlikely that any major policy action will occur at the July MPC meeting.”

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