Markets were choppy Tuesday as investors remained cautious in the run-up to a much-anticipated statement from U.S. Federal Reserve chairman Ben Bernanke.
The Fed is conducting its third round of massive bond purchases known as quantitative easing. The aim has been to help drive down interest rates and spur lending.
But a recent run of strong U.S. economic data, largely related to housing and jobs, has fueled speculation that the Fed might consider changing course. The prospect of a less-easy monetary policy has put a brake on stocks this week and helped support the dollar.
On Wednesday, Fed Chairman Ben Bernanke will appear before lawmakers in Congress and the central bank will release minutes of its most recent policy meeting. Both events have the potential to alter the mood in financial markets.
"What Bernanke has to say tomorrow will have a big bearing on the next move, not only in currency markets, but also equity markets," said Michael Hewson, senior market analyst at CMC Markets.
As a result, investors across financial markets were largely in wait-and-see mode.
In Europe, the FTSE 100 index of British shares ended the day up 0.4 percent at 6,786 a day after it closed at its highest level in over 12 years and in the wake of figures showing the inflation rate fell to 2.4 percent in April, its lowest in seven months. The fall in inflation has also raised the prospect that the Bank of England may enact another stimulus to shore up economic growth.
Elsewhere in Europe, Germany's DAX closed up 0.2 percent to 8,472. The CAC-40 in France was 0.3 percent higher at 4,036.
In the U.S., the Dow Jones industrial average was up 0.3 percent at 15,383 while the broader S&P 500 index was 0.2 percent higher at 1,669.
Over the past five years, the markets have become used to operating in an easy-money environment. The extra liquidity provided by many of the world's central banks has been recycled and has helped stock indexes hit highs despite a patchy recovery from recession. The Dow Jones and the S&P 500 indexes in the U.S. have both hit all-time highs _ as has Germany's DAX.
"It is broadly recognized that the fuel for this movement into risky investments has been the generous provision of cheap liquidity by central banks," said Jane Foley, an analyst at Rabobank International.
The dollar recovered part of its Monday losses when investors booked some recent gains _ the dollar has been increasingly in demand amid speculation of a winding down in the Fed's asset purchases. The dollar rose 0.3 percent to 102.43 yen while the euro was up slightly, 0.18 percent, to $1.2913.
The yen's renewed weakness against the dollar helped Japan's main Nikkei stock index to eke out a small 0.1 percent gain to close at 15,381.02, its highest finish in more than five years. The Nikkei has been a big winner this year, rising 48 percent, after the Bank of Japan announced a big monetary stimulus program designed to shake the country out of a two-decade stagnation and get prices rising, albeit modestly. One repercussion of that policy has been to pile the pressure on the yen _ a development that can help Japan's exporters and provide another fillip to growth.
Elsewhere in Asia, Hong Kong's Hang Seng declined 0.5 percent to 23,366.37 while South Korea's Kospi fell less than 0.1 percent to 1,981.09. Benchmarks in mainland China rose too.
Oil prices were subdued too, with the benchmark New York rate down 55 cents at $96.38 a barrel.
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