- The Washington Times - Friday, March 20, 2009

NEW YORK (AP) | Investors doused a 2-week-old stock rally Thursday as concerns emerged that the Federal Reserve’s new bond-buying campaign could wind up hurting the dollar and sparking inflation.

Banking and other financial shares pulled the market lower, but energy stocks got a boost from soaring crude oil prices.

The retreat came a day after stocks surged in reaction to the Fed’s aggressive plans to pump more than $1 trillion into the financial system by buying Treasury bonds and stepping up its purchases of other debt securities. The aim is to lower borrowing rates and stimulate lending.

On Thursday, investors began to digest the possible downsides of the Fed’s program such as a potentially weaker dollar. That could lead to higher prices for commodities such as oil and grains, and eventually everyday products like gas and food.

Skepticism about how long it would take for the effects of the Fed’s program to take hold also weighed down shares, particularly those of banks. Investors have been hungry for any signs that confidence may finally return to battered U.S. banks, and the market has had a generally dim view of the government’s efforts to date to get lending moving again.

The Dow Jones Industrial Average fell 85.78, or 1.2 percent, to 7,400.80.

The broader Standard & Poor’s 500 Index fell 10.31, or 1.3 percent, to 784.04, while Nasdaq composite index fell 7.74, or 0.5 percent, to 1,483.48.

Declining issues narrowly outnumbered advancers on the New York Stock Exchange, where volume came to 2 billion shares.

“After the initial euphoria surrounding the surprise announcement [Wednesday], there’s a little more analysis of this going on and it’s leading to some questions,” said Todd Salamone, senior vice president of research at Schaeffer’s Investment Research.

Wall Street’s move lower follows a buying spree that has driven stocks sharply higher since last week. Even with Thursday’s slide, the Dow is still up 13 percent and the S&P; 500 index is up 15.9 percent over the past eight days. The gains are impressive considering that only a few weeks ago the market was trading at levels not seen in more than a decade.

Some analysts had warned at the start of the rally that could turn out to be the type of short-lived rally that comes in bear markets, which are generally defined as a drop of at least 20 percent. The market is still about half below its peak in October 2007.

Some of traders’ jitters Thursday came ahead of a quarterly expiration of options contracts on Friday. The sudden settling of many of those transactions can cause a surge in trading volume and more volatility in stock prices.

Energy stocks bucked the market’s slide as oil surged above $50 a barrel. Oil jumped as the dollar sank against other major currencies in response to the Fed announcement. When the greenback weakens it essentially makes crude cheaper in other currencies.

Chevron Corp. gained 54 cents, or 0.8 percent, to $67.13, while Occidental Petroleum Corp. rose $2.14, or 3.8 percent, to $59.98.

Light, sweet crude rose $3.47, or 7 percent, to settle at $51.61 a barrel on the New York Mercantile Exchange.

Investors got a dose of good news Thursday from General Electric Co., which forecast a profitable first quarter and full year for its struggling finance unit. Fears that falling real estate values and unpaid credit card debt could further damage GE Capital have sent its stock price down 37.5 percent this year. GE slipped 19 cents to $10.13.

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