As the stock market whiled away the hours on Thursday, the dollar finally got off the carpet after setting yet another all-time low against the euro.

If last month's obsession was the ever increasing price of oil, which peaked at more that $55 a barrel on Oct. 25, this month has been all about the shrinking purchasing power of the greenback.

In just the last two weeks, the dollar has set an all-time low against the euro five times. On Thursday, the dollar staged a minirally back to $1.2961 per euro, after setting the latest record of $1.3074 earlier in the day.

The stock market posted modest gains. The

Dow Jones Industrial Average

gained about 0.2% to close at 10,572.55 as strength in technology and manufacturing shares were offset by weakness in financials. Company-specific news on the tobacco legal battle helped

Altria

(MO) - Get Report

to a 2.2% gain while a possible new mad cow disease outbreak dropped

McDonald's

(MCD) - Get Report

by 1.5%.

The

S&P 500

rose 0.1% to 1183.55 and the

Nasdaq Composite

added 0.2% to 2104.28.

For the dollar, Thursday's action was more of a pause, not a reversal. With the twin U.S. deficits of trade and spending creating a record current account deficit, there's no end in sight over the longer term. Goldman Sachs recommended that investors sell dollars against the euro while the global economic team at Wachovia abandoned its bullish stance relative to other major currencies.

Goldman analyst Kevin Edgeley wrote that technical indicators signal a fall in the dollar to as little as $1.335 per euro. The firm's dollar-sell call cited comments by Treasury Secretary John Snow that "the history of efforts to impose non-market valuations on currencies is at best unrewarding." That's an indication the U.S. isn't going to fight much to stop the dollar's decline.

Wachovia said it would "throw in the towel" on its dollar-rally prediction. The Bush re-election has made the odds of deficit reduction slim and there's no sign that other economies will strengthen enough to cause a surge in exports. "Given recent developments we are at a loss to explain what would turn the dollar around at this point," the analysts wrote.

Cynics might say that could be a short-term contrarian indicator, but it's not like Wachovia is a mighty power in the foreign exchange realm. Thursday's dollar recovery and continued rally in bonds show plenty of money is still chasing the bullish case on the greenback.

Unpleasant Precedence

And whither stocks? It's certainly been the case that stocks can rally at the same time that the dollar shrinks -- witness the past few weeks. But it often ends badly, as it did back then when interest rates rose in early 1987 and then stocks crashed in October. Even worse results appeared in the early 1970s when the Bretton Woods system of fixed currency-exchange rates was tossed aside. The dollar and stock market crashed together that time.

The weakening dollar doesn't treat all sectors the same, of course. A weaker dollar makes imports more expensive and exports less expensive to foreign buyers. It also feeds inflation and increases the pressure for higher interest rates.

One piece of conventional wisdom that has propped up the dollar in the past took a hit on Thursday as well. Dollar defenders claim that the historic stability of the U.S. currency has made it the preferred safe haven investment for governments around the world. But Russia, which holds more than $100 billion of foreign currency reserves thanks to its massive oil exports, said Thursday it was considering keeping more money in euros. The implications would be stark indeed if Asian governments also took that approach.

"This should be fairly bearish for the dollar and bullish for the euro as Russia's decision could set a precedent for future reserve reallocations by other central banks around the world," the analyst team at Foreign Capital Markets LLC in New York wrote on Thursday. "There already has been talk of Japan and China also possibly diversifying their holdings to include more euros."

The bond market has found a new reason to rally on dollar weakness which, all other things being equal, should make Treasuries a less desirable investment. The yield on the 10-year Treasury note, which moves down when its price moves up, declined to 4.12% from 4.14% on Wednesday.

The theory is that the bank of Japan will have to intervene in the currency market to halt the rise in the yen that is making Japanese exports more expensive and threatening the country's meager economic recovery. When the bank intervenes, it generally sells yen to buy dollars and invests the proceeds in Treasury bonds.

It could happen, although Goldman also sought to shred that theory, quoting a Bank of Japan executive downplaying the impact of the yen's surge so far. The yen was quoted at 104.21 to the dollar on Thursday, slightly weaker than the 104.05 level cited the day before.

The G20 group of leading countries and large emerging countries meets over the weekend and currency issues are sure to be the talk of the gathering. That chatter could shake out any number of ways on Monday, although the downward trend is fundamental in nature.

In terms of the strength of the U.S. economy, the Philadelphia Fed's index of regional manufacturing activity declined a bit more than expected to 20.7 in November from 28.5 the prior month. Any reading above zero indicates expansion and the index is well above the 13.4 level seen in September.

Significantly, the six-month outlook bounced back to 52.1 from a steep drop last month to 27.6, the lowest level in almost two years.

Inventories showed a negative reading for the first time since March. The now-ended, seven-month run-up in inventories was the longest stretch since 1974, according to the Philly Fed's data.

That could be an indication that the nationwide increase in inventories seen in the GDP reports will reverse as well. Inventories have been growing rapidly by historical measures. In the third-quarter GDP report, private inventories expanded by $47.5 billion after growing by $59 billion in the second quarter and $36.2 billion in the first quarter. As noted in September, the recent history of such buildups is a warning of slower growth.

Inventories increased 2.8% in the fourth quarter of 1999 when growth hit 7.3%. The next quarter, growth dropped to 1% as businesses sold down the inventory. Conversely, inventories shrunk in the last three quarters of 2001, by as much as 2.9% in the fourth quarter. Sure enough, growth accelerated in 2002 to double the earlier rate, as sales increased and businesses didn't have enough product on hand.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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