Stronger dollar, weak economic data pummels stocks

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A stronger dollar and more discouraging signs of a subdued economic recovery triggered a broad sell-off in stocks.

Major indexes tumbled more than 1 percent Thursday, including the Dow Jones industrials, which fell about 137 points.

Energy and material stocks showed the biggest losses as a jump in the dollar sent commodity prices tumbling. Meanwhile, an analyst’s downgrade of the chip sector pulled technology shares sharply lower.

Analysts said the dollar was the biggest force behind Thursday’s trading, as it has been in recent months. A stronger dollar makes commodities more expensive to foreign buyers, and companies that produce the commodities make less money from them.

“There might be a little fear out there about dollar strengthening, as well as some natural profit-taking opportunities,” said Dan Cook, senior market analyst at IG Markets Inc. in Chicago. “We’ve been on an amazing run.”

The stronger dollar also makes U.S. goods and services more expensive, and theoretically harder to sell, overseas. And U.S. companies that do business abroad make less money when their earnings are translated from other countries’ currencies into dollars.

The latest data on the economy gave investors little incentive to hold on to stocks.

A private forecast of economic activity rose less than expected in October, signaling slow growth next year. The Conference Board said its index of leading economic indicators, which forecasts activity over the next six months, rose 0.3 percent last month, less than the 0.5 percent gain economists anticipated. The index climbed 1 percent in September.

There was also disappointing news on housing. The Mortgage Bankers Association said more than 14 percent of American homeowners with a mortgage were either behind on their payments or in foreclosure at the end of September. The industry group’s quarterly report fed fears that a nascent recovery in the housing market could be upended by a continuing surge in loan defaults, especially as unemployment keeps rising.

Earlier Thursday, a report from the Labor Department said the number of newly laid-off workers seeking unemployment insurance was unchanged last week at 505,000, in line with expectations. But the figure remains above the level that would indicate the economy is adding jobs.

In early afternoon trading, the Dow fell 137.77, or 1.3 percent, to 10,288.54. The Standard & Poor’s 500 index fell 18.74, or 1.7 percent, to 1,091.06, while the Nasdaq composite index fell 43.17, or 2.0 percent, to 2,149.97.

The day’s trade marked a shift out of riskier assets and back into safe havens like the dollar and Treasurys. After amassing significant gains during an eight-month rally in stocks, investors are hesitant to take on too many extra risks as the year ends.

“Large money managers, going into the end of the year, are looking to protect their gains and are shifting assets,” said Adam Gould, senior portfolio manager at Direxion Funds in New York.

For much of this year, the dollar has been declining as the Federal Reserve’s record-low interest rates enable investors to borrow cheaply and encourage them to invest in assets other than cash. Commodity producers and other companies with major export operations have been among the biggest beneficiaries of the dollar’s slide.

Now, investors are starting to wonder whether the dollar’s decline has run its course and that other markets have gotten a little overheated considering the challenges the economy still faces, like high unemployment.

The market’s losses on Thursday added to a modest decline the day before when stocks slipped on a drop in home construction and worse-than-expected forecasts from technology companies.

A drop in technology shares weighed on the market again Thursday, after chipmakers, including Intel Corp., were downgraded.

“If a company like Intel isn’t going to do as was well as people think, then that has many ripple effects,” said Gould of Direxion Funds, adding that technology has been one of the areas of the economy thought to be strengthening.

Intel shares fell nearly 5 percent, losing 97 cents to $19.15. Texas Instruments Inc. fell 90 cents, or 3.5 percent, to $24.85, while Advanced Micro Devices Inc. fell 23 cents, or 3.1 percent, to $7.09.

Bonds rallied as stocks fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.34 percent from 3.37 percent late Wednesday.

The ICE Futures US dollar index, which measures the dollar against other major currencies, gained 0.3 percent, weighing on commodities prices. Gold prices were flat, while oil prices dropped $2.13 to $77.45 a barrel on the New York Mercantile Exchange.

More than five stocks fell for every one that rose on the New York Stock Exchange, where volume came to 558.8 million shares, compared with 559.4 million at the same time on Wednesday.

In other trading, the Russell 2000 index of smaller companies fell 15.59, or 2.6 percent, to 584.56.

Overseas, Britain’s FTSE 100 fell 1.4 percent, Germany’s DAX index lost 1.5 percent, and France’s CAC-40 slid 1.8 percent. Earlier Thursday, Japan’s Nikkei stock average fell 1.3 percent.

Copyright 2009 The Associated Press.