Falling dollar, rising commodities weigh on stocks
NEW YORK — Growing fears over a falling dollar and rising commodity prices kept the market’s spring rally on hold Tuesday.
Stocks dipped in midday trading after rising slightly earlier in the day on better-than-expected data on home construction, building permits and inflation.
The modest moves follow a big drop on Monday, indicating that investors are still nervous that a three-month surge in stocks may have been overdone.
Analysts say investors need more clear evidence of growth to restart the market’s rally, which has stalled in recent days as investors grow worried that a weaker dollar, higher commodity prices and climbing interest rates will hamper the economy’s recovery.
But after a 40 percent surge in stocks since March, analysts say a sideways move in the market is not only an encouraging sign of the rally’s strength, but is necessary for stocks to move higher.
“The market is very overbought right now and what it needs to do is consolidate and it needs to have a series of days like this,” said Jon Merriman, chief executive of Merriman Curhan Ford.
At midday, the Dow Jones industrial average fell 34.99, or 0.4 percent, to 8,577.14, after earlier rising as much as 31 points. The broader Standard & Poor’s 500 index slipped 3.65, or 0.4 percent, to 920.07, while the Nasdaq composite index fell 2.06, or 0.1 percent, to 1,814.32.
Stocks rose in the early going after the Commerce Department said home construction jumped in May by the largest amount in three months, after having fallen in April to a record low. And applications for building permits, which are seen as a good indicator of future activity, rose by 4 percent in May.
Meanwhile, the Labor Department said wholesale prices rose less than expected in May as a large jump in the price of gasoline offset a drop in food costs.
Not all the news was upbeat. The Federal Reserve said industrial production fell a larger-than-expected 1.1 percent in May as the recession hurt demand for manufactured goods including cars, machinery and household appliances.
“All in all I’m encouraged,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “But this is not a market that should be off to the races.”
On Monday, the Dow tumbled 187 points, or 2.1 percent, putting it back into the red for the year. Last week, the blue chips were up on the year for the first time since January. Monday’s decline was touched off by a stronger dollar, which sent commodity prices tumbling and put pressure on energy and material stocks.
But the dollar resumed its three-month decline against other major currencies Tuesday, pushing prices for commodities like oil and gold higher.
The dollar’s slide came after the Kremlin’s top economic adviser said Russia may put part of its currency reserves in bonds issued by Brazil, China and India. Arkady Dvorkovich said Russia could make the move if the other three nations reciprocate. Brazil, Russia, India and China are the members of the BRIC group of leading emerging economies.
A weaker dollar, and its subsequent impact on commodity prices and Treasury yields, has become one of investors’ chief concerns in recent weeks.
While higher commodity prices can indicate improving demand for industrial goods, analysts warn that a jump in prices combined with a weaker dollar could make it more difficult for the economy to emerge from recession.
“People are getting nervous about how they might be a drag on the consumer,” said Blaze Tankersley, chief market strategist at Bay Crest Partners.
The dollar lost ground against the British pound and the euro Tuesday, while the price of light, sweet crude rose $1.55 to $72.17 a barrel on the New York Mercantile Exchange.
Treasury yields retreated further Tuesday — a positive sign for homeowners. Yields on long-term Treasurys have been climbing as demand for bonds weakens amid a huge surplus of government debt. This is especially worrisome to investors because Treasury yields are linked to mortgages and other consumer loans. The fear is that higher borrowing costs could seriously undermine a recovery in the housing market and further strap the American consumer.
On Tuesday, the yield on the benchmark 10-year Treasury note slipped to 3.69 percent from 3.72 percent late Monday.
In corporate news, Best Buy Co.’s first-quarter earnings fell 15 percent as consumers cut back on items like appliances and digital cameras. The earnings topped Wall Street expectations, but sales at stores open at least a year fell 6 percent. The stock tumbled $2.41, or 6.2 percent, to $36.25.
About four stocks fell for every three that rose on the New York Stock Exchange, where volume came to 417.8 million shares.
The Russell 2000 index of smaller companies dipped 1.99, or 0.4 percent, to 509.84.
Overseas, Japan’s Nikkei stock average slid 2.9 percent. Britain’s FTSE 100 rose 0.1 percent, Germany’s DAX index rose 0.02 percent, and France’s CAC-40 slipped 0.2 percent.
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