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A Weak End to a Strong Month

Both the Dow and S&P 500 enjoyed their best months since October, but the dollar keeps sagging.

A solidly positive April ended in tepid fashion for equities, which seemed only nominally affected by some more serious weakness in the dollar.

After surrendering midmorning gains generated in conjunction with

Federal Reserve

Chairman Alan Greenspan's

generally optimistic congressional testimony, major averages rallied steadily from around 12 p.m. EDT until hitting their intraday peaks at about 2:30 p.m. Stock proxies waffled for an hour or so thereafter, then fell sharply in the final 30 minutes of trading, ending in arrears, albeit modestly so.

After having traded as high as 8528.75, the

Dow Jones Industrial Average

finished down 0.3% to 8479.19 while the

S&P 500

shed 0.1% to 916.7 vs. its earlier best of 922.01. The

Nasdaq Composite

closed down 0.5% to 1464.31 after trading as high as 1472.70.

For the second consecutive session, the Dow failed to sustain an intraday move above its March highs of 8522 while the S&P 500 failed to sustain a rally above its April 23 best of 919.70. Such short-term technical obstacles remain very much in reach, but the failure to accomplish them past the two days is a technical setback to the bullish case, even if a minor one.

At 1.65 billion shares on the

Big Board

, trading volume was up from the prior two days -- a negative given the final tallies -- although market breadth favored advancers by 19 to 13 and new 52-week highs bested new lows 127 to 14.

Similarly, the latest readings from Chartcraft.com's

Investors' Intelligence

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survey provided a cautionary sign. Bullish sentiment increased to 48.3% from 42.7% the prior week while bearish sentiment fell to 29.2% from 34.8%.

Wednesday's setback notwithstanding, April 2003 lived up to the month's historic performance as one of the best for stocks. For the month, the Dow rose 6.1% and the S&P 500 gained 8.1%, their best monthly gains since October 2002, while the Comp rallied 9.2%, its best month since November 2002. Additionally, the Dow Jones Transportation Average rose 13% for the month, its best since November 2001, and the Dow Jones Utility Average gained 8.1%, its best month since March 2002.

The monthly performance for stocks stood in sharp contrast to that of the dollar. The U.S. Dollar Index fell 1.9% for the month, and dropped 0.84 to 97.18 on Wednesday, its lowest close since February 1999. The euro rose to a four-year high of $1.1187 intraday before settling at $1.1182 in late New York trading.

Meanwhile, gold futures rose 1.6% to $339.40 per ounce, its highest level since mid-March.

Dog Days for the Dollar

Catalysts cited for the dollar's weakness included a weaker-than-expected report from the Chicago Purchasing Managers Index for April, which fell to 47.6 from 48.4 and vs. expectations for a slight increase. The new orders index fell to 44.6, the lowest level since December 2001. Separately, the National Association of Purchasing Management said its index of business conditions for New York fell to its lowest level since November 1999.

The Chicago PMI, particularly, raised concern about Thursday's Institute for Supply Management national survey, as well as Friday's employment report. (Buoyed by such concerns, the price of the benchmark 10-year Treasury rose 23/32 to 100 7/32, its yield falling to 3.84%.)

The risk is for "downside surprises" for the dollar in the next few days, according to Lara Rhame, economist and currency watcher at Brown Brothers Harriman.

Nevertheless, "the market is not looking at economic data" in determining currency values, Rhame said. Recent data from Europe have shown "the same old stagnation" on the Continent, and U.S. GDP is expected to well outpace that in the Eurozone this year, she noted. But "nobody seems to care. People are buying up euros like nobody's business and I don't know what would make this boat turn around."

Beyond concerns about the outlook for the U.S. economy, the greenback is being battered by a variety of factors that are contributing to a "global shift in sentiment away from U.S. assets," according to Rhame. These factors include psychological disappointment over the lack of a postwar bounce and ongoing yield discrepancies between the U.S. and Eurozone.

This is occurring against the backdrop of America's yawning

current account deficit, which is not a cause of dollar weakness, per se, but makes the greenback vulnerable, she said.

Lisa Finstrom, senior currency analyst at Salomon Smith Barney, largely agreed with that assessment, suggesting the key issue is the trend of global capital flows. Data from the Bureau of Economic Analysis showed positive inflows of foreign capital in the fourth quarter, but overall flows have diminished from peak levels and the BEA data are lagging. Anecdotal evidence suggests general cautiousness among foreign investors, particularly in Asia, regarding the dollar, she said.

"The postwar environment still looks shaky, even with some uncertainties behind us," Finstrom said, noting that neither the end of the military phase of 'Operation Iraqi Freedom' nor more recent improvements with North Korea or SARS have given the buck a lift. The dollar's ongoing "defensiveness underscores continued concerns about the U.S. economy and the fact U.S. rates are unattractive."

The European Central Bank's target rate is 2.5%, double that of the Federal Reserve. Furthermore, the ECB has sent pretty clear signals it will not ease at its May 8 policy meeting. Conversely, Greenspan hinted Wednesday that the Fed remains ready, willing and able to ease again, if need be, even if few Fed watchers expect a move on May 6.

"Comments from Fed officials aren't suggesting normalization" of the fed funds rate, which has been at 40-year lows since September 2001, Finstrom said. "They're comfortable keeping rates here, and are ready to cut rates further; it's an underlying negative" for the greenback.

There seems to be a never-ending string of "underlying negatives" when it comes to the dollar these days. Thus far, major stock proxies and U.S. Treasuries have been insulated from such concerns, particularly in the past month for shares. That bifurcation is unlikely to continue, assuming the dollar proves unable to mount a sustainable recovery.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.