Inflation worries spark dollar rally

Higher-than-expected November US inflation fuelled demand for the dollar yesterday. but weighed on stocks and bonds as investors feared the Federal Reserve may need to raise rates faster than anticipated.

Oil futures prices rose almost two per cent to settle above $70 a barrel following nine sessions of losses, offering some support to energy stocks. But Wall Street extended losses in late afternoon after bellwether General Electric issued a flat outlook for 2010.

Fears that the Fed could end its two-day meeting today with a more hawkish view on interest rates surfaced after data showed the US Producer Price Index jumped a surprising 1.8 per cent last month, much more than the 0.8 per cent forecast.

“Everyone’s on inflation watch,” said Burt White, chief investment officer with LPL Financial in Boston.
“Indeed, inflation is starting to creep in, and that’s going to build expectations the Fed will come in sooner, to slow the economic recovery down faster than what this market wants.”

Stocks slipped globally, with the all-country world stock index down 0.6 per cent.

The Dow Jones industrial average slid 49.05 points, or 0.47 per cent, to close at 10,452.00, while the Standard & Poor’s 500 Index declined 6.18 points, or 0.55 per cent, to finish at 1,107.93. The Nasdaq Composite Index fell 11.05 points, or 0.50 per cent, to end at 2,201.05.

GE shares slid 1.3 per cent to $15.75 after the company, considered an indicator of the US economy’s health, said its industrial and capital finance profits will likely be flat next year and revenues overall are expected to drop between five per cent and 10 per cent.

In recent weeks, the relationship among stocks and the dollar, oil and gold has broken down, with those asset classes trading more independently of one another than they normally do.

The U.S. dollar rallied to a 2-1/2-month high against the euro on speculation of higher US interest rates, but also because the European single currency was hurt by fiscal concerns in the euro zone following the downgrade of Greece’s credit rating last week.

Adding to those concerns was news that Austrian monetary authorities had put the country’s fourth-largest bank, Oesterreichische Volksbanken, on a watch list.

The euro weakened 0.83 per cent to $1.45. Against the Japanese yen, the dollar gained 1.2 per cent to 89.62. Inflation anxiety drove prices of US Treasuries lower.