What a Week: Dollar Dilemma

The dollar's weakness is not just about the diversification trend either. Investors fear a weaker dollar if the U.S. economy weakens enough to cause the Fed to ease; amid lackluster economic news, odds of a first-quarter rate cut have increased sharply in the past week in the fed fund futures market. Also hurting the dollar are currency traders chasing performance by jumping into the euro, as others unwind the carry trade, which involves borrowing money in low-yielding currencies to invest other higher-yielding currencies and their assets, writes Laidi.

The price of gold, which typically moves in the opposite direction of the dollar, was on the rise Friday, climbing 1.5% to $644.90 an ounce.

With gold on the rise and the dollar slipping, inflation becomes a greater potential threat. The price of imports, like oil, rise as the dollar loses its purchasing power. So while a relatively weak dollar is often considered bullish for stocks -- particularly multinationals who garner revenue from overseas sales in stronger currencies -- a sharp drop in the dollar can mean trouble at home.

The dollar's break below key resistance levels Friday captured stock traders' attention Friday, even as the Black Friday shopping session gets underway.

Though expectations remain high for this holiday shopping season, retailers were suffering in Friday's trade, including discounters Wal-Mart(WMT Quote) and Target(TGT Quote); apparel retailers Ann Taylor(ANN Quote) and Abercrombie & Fitch(ANF Quote), and; department stores J.C. Penney(JCP Quote), and Nordstrom(JWN Quote). The S&P Retail Index declined 0.7% Friday, and was down 0.8% on the week.

In concert with traders' fears of a weakening economy, sectors like transportation, semiconductors and the brokerages were also on the wane Friday.

The Dow Jones Transportation Average fell 0.4% Friday, and ended the week down 0.7%, while the Merrill Lynch Semiconductor HOLDRs(SMH Quote) closed down 0.4% Friday. On the week it is up a fraction. The Amex Securities Broker/Dealer Index took a breather from its recent rally as well. It declined 0.4% Friday, but was still up 2.1% for the week.

The wobbliness of the rally and this economy's legs will be clearer next week when the Fed's Beige Book comes out, the government reports revisions to third-quarter GDP, and reports emerge on manufacturing, core personal consumption expenditures and durable goods. Likewise, the Fed may shed some light on the latest data in speeches next week by Fed Chairman Bernanke, Chicago Fed President Michael Moskow and Philadelphia Fed President Charles Plosser.

Until then, happy bargain hunting.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting