Wall Street stocks retreated from records Tuesday while the dollar rallied after data showed the biggest jump in US inflation in more than a decade.
The consumer price index (CPI) spiked 5.4 percent in the 12 months ended in June, not seasonally adjusted, the highest rate since August 2008, the Labor Department said.
After major European bourses finished unchanged, all three main US indices pulled back from records, with the Dow shedding 0.3 percent.
"While it's easy to explain away a lot of the pieces that made that print, it's certainly added some concern to the broader market in general that perhaps inflation will be less transitory than we thought," Art Hogan of National Securities said.
The Fed has said repeatedly that stiff increases in consumer prices will be transitory, and so far the markets have largely accepted that argument.
But "if today's number doesn't mark the high-water mark, then Fed officials may start to shift a little bit more uncomfortably as we head into the autumn," commented Michael Hewson, market analyst at CMC Markets.
"For now, markets are buying the transitory narrative, however if the current trend continues, 'transitory' will be doing a lot more heavy-lifting than it is doing now," he added.
While US stocks fell, the "decline was modest," said Kathy Lien, foreign exchange analyst at BK Asset Management, in contrast to the dollar, which was "sharply higher" after the report.
Investors are keen to hear from Fed Chair Jerome Powell, who will testify in Congress on Wednesday, she said.
"The US dollar will give back gains if (Powell) downplays CPI but if he suggests the taper is right around the corner, the dollar could extend higher quickly," Lien wrote.
Elsewhere, oil prices rose after the International Energy Agency pointed to surging demand last month and expected more growth ahead.
"The oil market could get a lot tighter very quickly and that could mean the recent pullback might have run its course," said Edward Moya, an analyst at OANDA.
Major US companies are reporting second-quarter earnings this week, and before markets opened, Goldman Sachs and JPMorgan Chase announced soaring profits compared with the same period of 2020.
However, Goldman's stock closed 1.2 percent lower and JPMorgan lost 1.5 percent in what Hogan said was a "sell the news reaction" that is a consequence of investors pricing in the positive performance.
Boeing lost 4.2 percent after saying it will temporarily reduce production of its 787 Dreamliner after identifying a new issue with the jet during inspections.
- Key figures around 2130 GMT -
New York - DOW: DOWN 0.3 percent at 34,888.79 (close)
New York - S&P 500: DOWN 0.4 percent at 4,369.21 (close)
New York - Nasdaq: DOWN 0.4 percent at 14,677.65 (close)
London - FTSE 100: FLAT at 7,124.72 (close)
Frankfurt - DAX 30: FLAT at 15,789.64 (close)
Paris - CAC 40: FLAT at 6,558.47 (close)
EURO STOXX 50: FLAT at 4,094.56 (close)
Tokyo - Nikkei 225: UP 0.5 percent at 28,718.24 (close)
Hong Kong - Hang Seng Index: UP 1.6 percent at 27,963.41 (close)
Shanghai - Composite: UP 0.5 percent at 3,566.52 (close)
Euro/dollar: DOWN at $1.1787 from $1.1861 at 2100 GMT
Pound/dollar: DOWN at $1.3810 from $1.3883
Euro/pound: DOWN at 85.26 from 85.43 pence
Dollar/yen: UP at 110.62 from 110.37 yen
Brent North Sea crude: UP 1.8 percent at $76.49 per barrel
West Texas Intermediate: UP 1.6 percent at $75.25 per barrel