U,S STOCKS DECLINE MODESTLY ON STRONG DOLLAR , WEAK COMMODITIES

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* Friday, June 12, 2009 As of 11:32 PM (GMT +8 hours)
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* JUNE 12, 2009, 11:32 A.M. ET

US Stocks Decline Modestly On Strong Dollar, Weak Commodities

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By Peter A. McKay



Investors' simmering concerns about the U.S. government's finances led Friday to a stronger dollar, weaker commodity prices, and a modest stock-market slide.

The Dow Jones Industrial Average was down 11 points in recent trading. The Nasdaq Composite Index was recently off 1.2%. The S&P 500 fell 0.5%, hurt by declines of more than 1% each in its energy and basic-materials categories.

Treasurys prices climbed despite a report in The Wall Street Journal that the Federal Reserve is unlikely to significantly boost its purchases of Treasury and mortgage-backed paper when its rate committee meets June 23 and 24.

The news followed recent auctions of 10-year and 30-year Treasury debt that sent mixed messages about the level of demand for the tidal wave of paper the government is due to issue the next few years to fund its efforts to prop up the sagging U.S. economy.

A go-slow approach by the Fed would essentially be aimed at using that uptick in borrowing costs to stave off inflation, though skeptics on Wall Street believe the central bank could inadvertently choke off a recovery if it acts too soon. That debate carries heavy implications for every form of investment that changes hands on the world's trading floors.

"You can see right now, we're at this interesting fork in the road," said Paresh Upadhyaya, currency portfolio manager at Putnam Investments, which has bet against both the dollar and the euro because of the lingering weakness in those denominations' home economies.

"I just don't buy this inflation argument at all," Upadhyaya said. "The only reason I think we've seen Treasury yields drift higher is because of the increased supply we've already seen."

The direction of rates is vital to currency-focused managers because it affects how much return they can make by borrowing in one country's currency and lending the money out in loans denominated in another country's money.

On Friday, the dollar rallied on hopes that the Fed would essentially be protecting the greenback's value by refraining from Treasury purchases that would drive rates down. The U.S. Dollar Index was recently up 0.7%.

Currency traders also placed bets on possible outcomes from the meeting of the Group of Eight finance ministers in Italy starting Friday.

The dollar's rally pushed down the prices of raw materials traded globally in dollar terms. Oil futures, which have been hitting new 2009 highs in recent sessions, were down 63 cents to $72.05 a barrel in New York. The broad Dow Jones-UBS Commodity Index was off 1.3%.

Major commodity producers suffered as well. Alcoa was down 2.8%. U.S. Steel fell 5.3%. Chevron was down 0.6%.

Homebuilders also fell, reflecting a concern that a Fed that is newly hawkish on inflation could makes it more difficult for prospective home buyers to get mortgages. An ETF on the S&P's builders was down 2%. Among individual builders, KB Home was off 2.7%, Pulte Homes was down 1.4%, and Toll Brothers was off 1.7%.

The two-year note was recently unchanged, yielding 1.325%. The 10-year note gained 10/32 to yield 3.825%.

In economic news Friday, the government reported that import prices rose for a third straight month in May. Still, they were down 17.6% compared to May 2008, the largest one-year decline since the index was first published in 1982. While petroleum import prices rose 8.3% in May from April, they were down 51.4% on the year.

NOTE: the economic neews , the goverment reported that imoport price rose for a third straigh month in may.

Overseas, Asian shares ended mostly higher, led by Japanese stocks. Japan's Nikkei 225 rose 1.6%, making it back over the 10000 mark to touch an eight-month high, while South Korea's Kospi Composite gained 0.7%.

In Europe, stock markets fell modestly after dismal industrial production data fueled renewed concerns about the length and depth of the recession. The FTSE 100 Index fell 0.4%.





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