(Adds quotes, new prices)
* GameStop (NYSE:GME), AMC soar as hedge funds cut short positions
* Dollar gains on safe-haven buying, Treasury yields fall
* All eyes on Federal Reserve policy statement
By Matt Scuffham and Herbert Lash
NEW YORK, Jan 27 (Reuters) - Stocks fell around the world and the dollar rose on Wednesday as investors turned more cautious on fear of stretched stock valuations and the economic impact of the COVID-19 pandemic, with the Federal Reserve meeting later in the session a focus.
European stocks tumbled and the euro slid as extended coronavirus lockdowns drove the German government to slash its growth forecast for 2021, while talk of further interest rate cuts by the European Central Bank hit banking stocks.
The pan-European STOXX 600 .STOXX closed down 1.2% in its biggest single-day percentage fall in more than five weeks.
U.S. equity declines were exacerbated by hedge funds dumping long positions to cover a short squeeze sparked by a sharp rally in GameStop GME.N and AMC Entertainment Holdings AMC.N , which each more than doubled in heavy trade. the past three days in GameStop has averaged almost 185 million shares a day, an enormous jump from an average 6.73 million shares in the first week of trading this year.
The stampede of retail investors has disrupted the marketplace, taking seemingly rational investments and turning them upside down, said Jack Ablin, chief investment officer at Cresset Capital Management in Chicago.
"The retail investors are identifying the hedge fund fat cats shorting shares and making them pay," Ablin said.
The Dow Jones Industrial Average .DJI fell 1.07%, the S&P 500 .SPX lost 1.47% and the Nasdaq Composite .IXIC dropped 1.18%.
MSCI's benchmark for global equity markets .MIWD00000PUS fell 1.3% to 657.4, while its index for emerging markets stocks .MSCIEF fell 1.05%.
AMC rose 206%, GameStop 131% and Express Inc EXPR.N 255% on the New York Stock Exchange.
Investors parsed through earnings reports from companies including Boeing (NYSE:BA) BA.N and Microsoft MSFT.O ahead of the Fed's policy statement at 2 p.m.
Boeing Co BA.N posted a record annual loss but shares in Microsoft hit a record high after reporting its Azure cloud computing services grew by 50%. earnings from U.S. tech giants including Facebook FB.O and Apple AAPL.O , are due after the bell at 4 p.m.
In currency trading, the dollar index =USD rose 0.403%, with the euro EUR= down 0.39% to $1.2113.
The Japanese yen JPY= weakened 0.44% versus the greenback at 104.07 per dollar.
U.S. Treasury yields slid in line with weaker stocks as risk appetite hit a wall ahead of the Fed's policy announcement.
The U.S. central bank is likely to maintain its ultra-accommodative policy as the pandemic weighs on the economy, but investors want to see the Fed's economic outlook given likely strong fiscal measures under the new U.S. administration.
Investors see bonds as a safe haven, especially given the short-covering and disruption occurring in equity markets, said Ellis Phifer, market strategist, at Raymond James in Memphis.
"If it continues to spread, you get more margin calls, more firms having to potentially shut down and they're leveraged so they start selling more and you can end up in a bad spot," Phifer said.
The 10-year U.S. Treasury US10YT=RR note fell 0.03 basis points to yield 1.011%.
Gold prices fell to a more than one-week low, pressured by concerns over the U.S. stimulus bill and strength in the dollar.
Spot gold prices XAU= fell -0.33% to $1,844.18 an ounce.
The International Monetary Fund raised its forecast for global economic growth in 2021, and said the coronavirus-triggered downturn last year would be nearly one percentage point less severe than expected. COVID-19 cases surpassed 100 million on Wednesday and countries around the world are struggling with new variants of the virus and delays in vaccine rollouts. prices ticked up as a massive drawdown in U.S. crude inventories countered persistent concerns about the coronavirus pandemic continuing to hurt fuel demand.
U.S. crude oil stocks dropped by nearly 10 million barrels last week to their lowest since March at 476.7 million barrels as imports dropped off, the Energy Information Administration said, compared with analysts' expectations in a Reuters poll for a rise in inventories. EIA/S
Brent crude futures LCOc1 rose $0.34, to $56.25 a barrel. U.S. crude futures CLc1 gained $0.57, to $53.18 a barrel.
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http://tmsnrt.rs/2ihRugV Global asset performance
http://tmsnrt.rs/2yaDPgn Fed Balance Sheet
https://tmsnrt.rs/3iOsevC
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