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Muted Euphoria Greets Dow Record

The index hits a new high. Does a weak dollar pose a risk?

The blue chips made more new highs on earnings news Wednesday as traders largely ignored the U.S. dollar's nose dive.


Dow Jones Industrial Average

gained 0.2% to an all-time high of 12,803.84, beating its Feb. 20 high by 17 points. The

S&P 500

added 0.1% to mark another consecutive six-and-a-half-year high of 1472.50. Pressured primarily by



big decline, the

Nasdaq Composite

slipped 0.3% to 2510.50.

Traders note that the usual exuberance is not accompanying this all-time high for the Dow. The cautious excitement comes from no desire to drive up bullish sentiment and repeat the late February panic.

"I see these days of hanging tough as testimony to the market's strength," says Larry Wachtel, consultant to Wachovia Securities. He notes that the market went from panic to new highs in less than six weeks, so it is early to start feeling high on the hog. "Every day is a minor triumph," says the market veteran.

On Wednesday, the Dow was supported by a strong earnings report from

JPMorgan Chase

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, which soared 3.8%, and dragged the financial sector yet another leg up Wednesday. Likewise,


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reported a jump in its commercial airline sales and a big contract win to build South Korean fighter jets. Boeing added 3.8% Wednesday to close at an all-time high.

The technology sector took a backseat during the trading session as investors lamented Yahoo!'s poor earnings report Tuesday night while


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disappointed. Yahoo! fell 11.8%, while Netflix slipped 9.4% on the day.

Shares of



gained 1.5% on news that its earnings met with Wall Street's expectations, while competitor

Research In Motion


gained 2.4% after the company fixed its BlackBerry outage problem that left portable email users stranded Wednesday morning.

After the closing bell,


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solidly beat Wall Street's expectations and gained 3.6% in postclose trading.

Kraft Foods


inched past earnings estimates and was gaining 0.8% in after-hours trading.

Broadly speaking, the market is moving on earnings growth that is beating estimates. Furthermore, the notion of a soft-landing scenario has not disintegrated and there's still-abundant liquidity in the financial system. But weakness in the dollar, if it persists, could become a drag on the market.

Is the Dollar the New Subprime?

The greenback hit a 26-year low vs. the British pound overnight Tuesday, a three-year low against the euro, a 17-year low against the Australian dollar and a four-month low against the Canadian dollar. The trade-weighted Dollar Index finished the day at 81.70 after trading as low as 81.57 intraday -- the lowest since March 2005. A slide under 80 would bring the index to levels not seen since the 1970s. Investors sold the dollar as the prospect of higher interest rates faded with a lower-than-expected inflation reading in the U.S.

"The dollar could become a central focus for stock investors," says James Paulsen, chief investment strategist for Wells Capital Management.

Unlike other asset classes which have clearer consequences to their moves up or down, there are arguments for and against dollar weakness, notes Paulsen. The weak dollar assists the U.S. in competing globally for export dollars. But a falling dollar is also cause for rising inflation and a

Federal Reserve

that can't cut rates.

If the dollar's fall captures the market's attention, traders may also worry that foreign and domestic investors will pull their money out of U.S. equities. That may be true, but it is not new. Overseas markets have been outperforming U.S. stocks through most of this decade, and investors have been on that bandwagon for a long time.

Retail investors have poured their money into international funds, and institutional managers believe the best bargains are in Europe, according to Merrill Lynch's monthly fund manager survey released Wednesday. In 2007, euro-zone equities have outperformed the U.S. market by about 6% on a common currency basis, according to Merrill. The survey reports that 38% of investors believe the outlook for European profits is most positive, while 26% say euro-zone stocks are undervalued.

The trend is unlikely to unwind given that fund managers reported a resurgence of risk appetite in April. After dipping to a reading of 37 in March, the Merrill survey's measure of risk appetite ramped back up to 41. Cash balances fell back in kind -- dropping to an average 3.9% from 4.4% in March, according to the survey.

Part of what has kept traders from worrying about the dollar is its conspicuous resilience vs. Japan's yen, notes Ashraf Laidi, chief foreign exchange analyst at CMC Markets. While rising euro-zone and commodity-related currencies are a reflection of inflation and growth in those regions, a rising yen would likely be caused by an unwinding of the carry trade (in which investors borrow money in low-interest yen to invest in higher yielding assets around the globe).

Many traders would see the carry trade unwinding as a threat to global liquidity. Such sentiment could well inject some fear into the stock market all over again.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


to send her an email.