Wall Street's Focus to Shift to Dollar, Interest Rates

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The post-election stock market rally has been rudely interrupted by the implications of a sliding U.S. dollar, higher interest rates, the U.S. current account deficit and Friday's rebound in oil prices.

Next week's stock markets could be affected by any hints on currency levels or interest rates by finance ministers and central bank governors at the G20 group of rich and emerging market nations meeting in Berlin this weekend.

Federal Reserve (search) Chairman Alan Greenspan (search) spooked investors on Friday with an unusually direct reminder that ove higher.

The dollar sank across the board, dropping to 4-1/2-year lows against the yen, after Greenspan said demand for U.S. assets could ease at some point given the size of the current account deficit.

Not even the Thanksgiving holiday on Thursday can guarantee a benign week for stocks. That's because any more news on higher rates and a lower dollar could curb the consumer spending and borrowing that drive the bulk of U.S. companies' profits.

"I think it's going to be on balance a quiet week," said Hugh Johnson, chief investment officer at First Albany Corp. in Albany, New York.

"But there is the distinct possibility, depending on who says what, that it could become a much more volatile and exciting week than anybody predicted."

The dollar's tumble has stirred concern that a dollar rout could destabilize the global economy. That drop has accelerated since the U.S. elections as worries mount over financing the U.S. current account deficit, which has ballooned to more than 5 percent of gross domestic product.

"The focus now, short-term, is on the dollar," said Johnson. "The worry, just as Alan Greenspan has told us, is that the dollar will continue to decline and foreign investors will lose their appetite for U.S. stocks and bonds.

"It's very clear to me if you look over the last year that foreign investors are backing away from our stock and bond markets."

Equity markets will look to earnings due next week from companies including condiment maker H.J. Heinz Co. (HNZ), Krispy Kreme Doughnuts Inc. (KKD), toy maker Toys R Us Inc. (TOY) and farm equipment maker Deere & Co.(DE).

Economic reports due on Wednesday on durable goods orders, consumer sentiment and jobless claims will also figure large on investors' radar.

Also on Wednesday, the Energy Information Administration (search) provides weekly information on U.S. petroleum inventories. The level of inventories helps determine prices for petroleum products.

The blue chip Dow Jones industrial average has risen about 7.75 percent from the 2004 low it touched on Oct. 25.

But on Friday, the Dow, the Standard & Poor's 500 Index and the technology-laced Nasdaq Composite Index all fell more than 1 percent after Greenspan's comments.

Also on Friday, crude oil reversed some its recent slide and leapt on jitters over fuel supplies, with NYMEX December crude ending up $2.22 at $48.44 a barrel.

The dollar, however, remained uppermost in investors' concerns.

Michael Metz, chief investment strategist at Oppenheimer & Co., said a lower dollar, eventually, was bullish for markets because it could help redress the trade imbalance. Analysts, though, say the transition period could be painful as the dollar falls to lower levels.

A lower dollar stokes inflationary pressures as imports get more expensive, Metz observed.

"It's really a no-win situation, at least in the transition period, which could last quite a while," Metz said. "We are in new ground here. I think we are in a very difficult situation, and until the last day or so everyone has chosen to ignore that because they wanted to hop aboard a fast-moving train.

"You have to remember the American market is not dominated by conservative, long-term investors," he said. "It is dominated by short-term traders who are compensated on a performance basis."