While the stock market struggled to sustain early gains and the bond market simply struggled, the dollar got a day of respite Tuesday. The greenback inched higher after Federal Reserve Chairman Ben Bernanke dashed market hopes that the central bank would stop raising rates after next week's presumptive rate hike. Bernanke's comments Monday evening were followed by Tuesday's report that core producer prices rose more than expected last month. This didn't go down well in the bond pits. The price of the benchmark 10-year Treasury bond fell sharply while its yield, which moves inversely, rose to 4.72%. Rate fears and higher bond yields also eventually caught up with stocks. After trading as high as 11,335, the Dow Jones Industrial Average dropped 39 points, or 0.35%, to 11,235. The Dow fell despite a 5.5% gain in General Motors ( GM), which rallied on expectations of a deal between Delphi, its bankrupt parts supplier, and the United Auto Workers union. Rate-sensitive issues, such as homebuilding and financial stocks, however, gave back some of the prior gains posted on hopes of an end to rate hikes. The Philadelphia housing sector index fell 1.8%, led by big declines in Champion Enterprises ( CHB) and Pulte Homes ( PHM). The S&P 500 dropped 0.6% to 1297 after trading near 1311, while the Nasdaq Composite fell 0.9% to 2294 vs. its intraday high of 2333. But the dollar, which has remained supported by the Fed's 21-month-long campaign to raise rates, gained 0.5% vs. the euro and 0.7% vs. the yen.
The Dollar's China Syndrome
Currency traders might want to keep an eye on an other development that could quickly end the dollar's newfound strength: Three U.S. senators landed in China on Tuesday for a "fact-finding" mission to determine whether they should push a proposal to impose a 27.5% tariff on Chinese imports.