The dollar and U.S. Treasury yields rose on Friday after a Japanese newspaper said Lawrence Summers would soon be named to head the Federal Reserve, prompting bets on a faster cutback in its stimulus programme.
The greenback jumped as much as 0.3 percent against a basket of major currencies and 10-year U.S. Treasury yields touched a high of 2.957 percent, up 4 basis points from Thursday's New York close. World shares edged lower.
Japan's Nikkei business daily, citing unnamed sources, said U.S. President Barack Obama would name the former Treasury Secretary to take over from Ben Bernanke after the U.S. central bank's policy meeting ending on Sept 18, at which it is expected to start reducing its massive monetary stimulus.
While traders had doubts about the source of the report, analysts said its impact highlighted the sensitivity of investors to choosing Summers, who markets believe might tighten monetary policy faster than the other main candidate, Fed Vice Chair Janet Yellen.
Markets generally expect the Fed to announce a tapering of its monthly $85 billion of bond purchases next week in response to signs of growing strength in the economy, but the pace of future cutbacks is less clear.
"In the coming months given that the new Fed chairman starts in January, the Summers effect, if it is announced, could be as dominant (as the Fed's tapering decision)," said Mike Gallagher, managing director of IDEAglobal.
Gallagher said the combination of a Fed tapering decision next week and the prospect of Summers becoming chairman could set U.S. Treasury 10-year yields on a course towards 3.5 percent by year's end.
But a successful Summers nomination is far from certain, and any appointment must be approved by the U.S. Senate.
U.S. stock index futures pointed to further weakness on Wall Street when trading resumes, linked to profit-taking ahead of the Fed's tapering decision and after the S&P 500 index snapped a seven-day winning streak on Thursday.
U.S. retail sales and consumer confidence data due later are unlikely to change the big picture.
European shares also dipped. The broad FTSEurofirst 300 stock index was down 0.1 percent, with the mining sector a big loser as metal prices suffer from the expected Fed stimulus curbs. Data showing a slower rate of decline in euro zone employment in the second quarter had little impact.
Earlier MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.8 percent, pulling further away from a three-month high and on track for a second day of losses after a 10-day winning streak - its longest run in six years.
The Asian gauge is still up 2.2 percent this week.
In Tokyo, the Nikkei share average bucked the trend and edged up 0.1 percent on reports the government is considering lowering the corporate tax rate next year as part of efforts to soften the impact of a planned consumption tax hike.
In commodity markets, gold was on course for its worst week in two months after heavy selling linked to expectations of the Fed rollback and an easing of tensions over Syria.
"This is almost certainly the pricing in of the expectations of QE tapering," Mitsubishi analyst Jonathan Butler said.
Gold was quoted at $1,312.66 an ounce, down 0.6 percent has now lost around 19 percent this year.
Brent crude oil slipped below $112 a barrel on course for its biggest weekly loss in three months as the United States and Russia worked on a plan for Syria to surrender its chemical weapons.
"Since concerns on a possible U.S.-led military strike against Syria have eased, market participants are just waiting for the outcome of next week's Fed meeting," said Masaki Suematsu, Energy team manager at Newedge.