*

Stocks fall ahead of Wednesday's Fed policy decision

*

Germany's Merz unexpectedly fails to be elected chancellor

*

Investors await trade deals between US and partners

*

Asian FX in the spotlight after Taiwan dollar's surge

By Samuel Indyk and Ankur Banerjee

LONDON, May 6 (Reuters) - Global stocks dropped on

Tuesday as concerns about tariffs and their impact on the

economy lingered and as German conservative leader Friedrich

Merz unexpectedly failed to secure the parliamentary votes

required to become chancellor.

Markets were processing the surprise from the Bundestag

where Merz failed to garner the votes required, dealing a major

blow to his proposed government that has promised to revive

economic growth at a time of global uncertainty.

"I didn't expect what happened today to have happened at

all," said George Lagarias, chief economist at Forvis Mazars.

"Markets are going to be extremely negatively surprised if

Merz fails to be elected as chancellor and Germany falls into

disarray."

Merz now has 14 days to try and win parliamentary support,

and while this is not seen as a fatal setback, his failure to

win parliamentary backing at the first time is a first for

post-war Germany.

Germany's DAX fell by as much as 2% but was last

down about 1.3%. Britain's FTSE 100 was down 0.3%.

Investor attention remains on the possibility of easing

trade tensions between the U.S. and China after Beijing last

week said it was evaluating an offer from Washington to hold

talks over tariffs.

U.S. President Donald Trump said on Sunday that Washington

is meeting with many countries, including China, and that his

main priority with China is to secure a fair deal.

"We've seen a backpedalling and the trade risk has become

lower," said Lars Skovgaard, senior investment strategist at

Danske Bank.

But with few details coming out about trade discussions,

investors have been left trying to make sense of headlines

coming out of the White House.

"Now we need to see some deals being announced otherwise the

rise in stocks will fade again," Skovgaard added.

Europe's STOXX 600 was down 0.7% on Tuesday but

remains close to its closing level on April 2, the day Trump

announced his tariff proposals.

In Asia, MSCI's broadest index of Asia-Pacific shares

outside Japan, was down 0.1% with Japan closed

for a holiday.

Chinese markets returned from an extended holiday with the

blue-chip index and Hong Kong's Hang Seng both

up about 1%.

The Federal Reserve begins its two-day policy meeting on

Tuesday, where the central bank is widely expected to keep rates

steady but the spotlight will be on how policymakers are likely

to navigate a tariff-ridden path.

"The Fed remains caught between a rock and a hard place,"

said Christian Scherrmann, DWS chief U.S. economist. "We think

they will opt for a slightly more hawkish tone, but more in the

direction of an extended pause than a potential hike."

Traders are pricing in 75 basis points of easing this year

with the first move possible in July, LSEG data showed.

U.S. stock futures were falling on Tuesday, with S&P futures

down 0.7%.

DOLLAR SLIPS, RISES VS ASIAN FX

Trump's erratic trade policies have fuelled significant

waves of dollar selling since April as investors shifted away

from U.S. assets, pushing the euro, yen and Swiss franc higher.

The euro on Tuesday was little changed against the dollar

at $1.1315, trimming an earlier rise after Germany's

parliamentary vote. The yen was up 0.3% at 143.24 per dollar

.

The dollar selling has spread to other Asian FX, underscored

by the Taiwan dollar's record surge in recent sessions,

which has stoked speculation that a revaluation of regional

foreign exchange was possible to win U.S. trade concessions.

The Taiwan dollar was fairly sedate on Tuesday last fetching

30.28 per U.S. dollar, not far from the near three-year high of

29.59 it touched on Monday.

The focus has turned to Hong Kong, where the de facto

central bank bought $7.8 billion to stop the local currency from

strengthening and breaking its peg to the greenback.

"If these currencies keep strengthening sharply, it could

spark fears of a 'reverse Asian currency crisis', with potential

ripple effects in the bond market amid fears that Asian

institutions reassess their unhedged exposure to Treasury

holdings," said Charu Chanana, chief investment strategist at

Saxo.

The Hong Kong Monetary Authority said on Tuesday it has been

diversifying currency exposure in its investment portfolio to

manage risks.

On the mainland, China's yuan strengthened to its

highest level since November at 7.2105 per dollar.

In commodities, oil rose after hitting four-year lows in the

previous session that was driven by an OPEC+ decision to

accelerate output increases. Brent crude futures were

last up 2.7% at $61.87 per barrel.

Gold prices rose 1.4% to a two-week high of $3,386/oz on

safe-haven demand.

(Editing by Kate Mayberry, Sharon Singleton and David Evans)