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Stocks see reversal as dollar rebounds

November 13, 2009|Tom Petruno

Has the "carry trade" become too tired to carry on in the short term?

Thursday's session in global markets saw a reversal of the recent rush into gold, emerging markets and stocks in general, and a rebound in the beaten-down dollar.

That spurred talk that the army of hedge funds and other speculators engaging in the carry trade -- the popular strategy of borrowing in dollars at rock-bottom interest rates to invest in risky assets, such as stocks, worldwide -- might be getting anxious to lock in gains after the markets' powerful run since July.

"It's prime time to take some profits," said Michael Woolfolk, currency strategist at Bank of New York Mellon.

On Thursday the Dow Jones industrials fell 93.79 points, or 0.9%, to 10,197.47, while the Standard & Poor's 500 index dropped 11.27 points, or 1%, to 1,087.24. Most foreign stock markets fell as well.

Meanwhile, an index of the dollar's value against six other major currencies rose 0.7%.

The percentage changes weren't huge, but some traders were pointing nervously to a potential "double-top" pattern -- twin peaks -- in their charts.

The S&P 500, for example, pulled back Thursday after briefly surpassing the 1,100 level. The index also had failed to hold above that level after topping it intraday on Oct. 21. That prior failure gave way to a sell-off that took the S&P down as low as 1,030 by Nov. 2, a drop of more than 6% from the Oct. 21 high.

The same double-top pattern may be playing out with the euro, which in recent days has made another attempt to push decisively through the $1.50 level, without success. The European currency ended at $1.487 on Thursday.

The euro also peaked at around $1.50 on Oct. 26, then fell to near $1.46 by Nov. 3, before making another run for $1.50 this week.

In the case of the euro and other favored investments of the carry-traders, "you couldn't take out the [October] highs today, so some traders are throwing in the towel," fearing a serious loss of momentum, said Brian Dolan, currency strategist at Gain Capital Group in Bedminster, N.J.

Some traders also may be wary of betting further against the dollar in the near term with the U.S. again jawboning for a "strong" greenback and with Thailand, Russia and other countries reportedly buying dollars to try to slow their own currencies' advances against the buck.

The point is, if the carry trade is about to see a respite, the dollar could get a bounce -- and all of the things bought with borrowed dollars could shift into reverse for a while.

In other market highlights Thursday:

* Treasury yields fell in the day's retreat from risk-taking. The 10-year T-note dropped to 3.44% from 3.48% late Wednesday.

* Gold fell, ending a streak of eight gains. Near-term futures fell $8 to $1,106 an ounce.

* Energy stocks in the S&P 500 slumped 2%, more than any other broad industry group, and oil prices sank after the Energy Department reported a bigger-than-expected increase in crude inventories. Oil futures fell $2.34 to $76.94 a barrel in New York.

* Shares of 3Com surged 31% on the news late Wednesday that Hewlett-Packard agreed to buy the maker of networking equipment for $2.7 billion. 3Com rival Brocade Communications Systems tumbled 13% after news of the deal prompted analysts to downgrade the stock, citing the loss of a potential partnership with Hewlett-Packard. HP's shares fell 0.6%.


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