Strong dollar hits commodities

By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - Prospects for a stronger dollar prompted visions of a cooling of the commodity boom on Wednesday, sending equities in Europe lower but boosting Tokyo stocks sharply.

Oil played along with the mood, falling below $124 a barrel, more than 8 percent below its peak two weeks ago.

The catalyst for many market moves remained Federal Reserve Chairman Ben Bernanke's unusually explicit warning on Tuesday about the inflationary threat from a weak U.S. currency.

It was widely taken as a signal that the Fed was done with its rate-cutting cycle and boosted the dollar, which is now up more than 2 percent in a week against a basket of currencies .DXY.

In Europe, where many share indexes are linked to commodities through mining and oil companies, stocks took a hit. The pan-European FTSEurofirst 300 .FTEU3 was down 1.75 percent.

There were also deep concerns about the state of the financial sector focused on the possibility that Lehman Brothers LEH.N may need to raise more capital.

"The dollar actually rules the roost today," said Howard Wheeldon, a senior strategist at BGC Partners. "We are reminded that the dollar isn't just about oil, it has a significant affect on all commodities.

"The theme out there is very, very depressing. Good news is in very short supply (and) we've got to sit this one out for some while yet."