Dollar Rebound Boosts Stocks, Hits Commodities

Escalating violence in Georgia helped send emerging economy stock markets to their lowest in almost a year.

The dollar raced to five-month highs against a broad range of currencies on Friday, benefiting from fears economic weakness was spreading to other countries, while oil slumped to $115 a barrel as supply concerns waned.

Escalating violence in Georgia helped send emerging economy stock markets to their lowest in almost a year. Russia was the hardest hit as investors suddenly viewed all emerging markets as riskier.

Stock markets were transfixed by falling oil, though, which inspired Wall Street to shake off a weak start and pushed major stock indexes up more than 2 percent. European stocks also benefited from the improved sentiment.

The rebound in risk appetite hurt safe-haven assets such as government bonds, as is normally the case. This sent prices lower on U.S. Treasuries and weighed on euro zone government paper, making yields, which move inversely to prices, rise.

"The general market is being moved along by the surprising strength of the dollar, which is exacerbating the slide in oil prices -- so all positive for stocks," said Bruce Zaro, chief technical strategist with Delta Global Advisors in Boston.

"I do feel that July 15 represented the bottom for stocks and we are going to move higher."

The Dow Jones industrial average ended up 302.89 points, or 2.65 percent, at 11,734.32. The Standard & Poor's 500 Index closed up 30.25, or 2.39 percent, at 1,296.32. The Nasdaq finished up 58.37, or 2.48 percent, at 2,414.10.

Wall Street largely shrugged off news that Fannie Mae, the largest U.S. home funding source, posted a fourth straight quarterly loss as home loan defaults increased.

The company said it would slash its dividend more than 85 percent and take other steps to shore up its capital position.

Traders were betting the further drop in oil would help inflation to ease, stimulating spending by businesses and cash-strapped consumers and so restoring corporate profit growth.

U.S. oil prices fell $4.92, or 4.1 percent, to $115.10 per barrel. Ironically, the market for crude was responding to worries about weaker demand.

The stronger U.S. dollar also helped, however, outweighing concerns that an intensifying conflict between Russia and Georgia could disrupt Caspian energy supplies.

"It seems that we've got a lot of selling based on the stronger dollar," said Peter Beutel, president of trading consultants Cameron Hanover in New Canaan, Connecticut.

"Energy demand destruction and the dollar return have formed a quiet alliance to bring the oil market down, and today the louder of the two is the dollar."

WEAKNESS IN EUROPE

The dollar was up against a basket of major trading-partner currencies, with the U.S. dollar index up 1.73 percent at 75.842 from a previous session close of 74.551.

The euro was down 2.02 percent at $1.5012. Against the yen, the dollar was up 0.71 percent at 110.21.

Data showing Italy's economy shrank in the second quarter cast a shadow over the euro zone a day after European Central Bank President Jean-Claude Trichet highlighted risks to growth, even though he reiterated his concerns about inflation.

Markets interpreted Trichet's comments as dovish, sparking a steep fall in bond yields as markets priced out the risk of another euro zone interest rate hike this year.

"There's going to be more speculation of ECB rate cuts later this year," said Gerhard Schwarz, head of global equity strategy at UniCredit in Munich.

Japan's corporate bankruptcies rose to their highest in five years in July while sentiment among service sector workers fell to a nearly seven-year low, adding to a growing view that the world's second-largest economy is now in recession.

The gloomy data came a day after the Japanese government cut its view on growth and suggested the economy may have entered a recession as high raw material costs and a global slowdown continued to bite.

The recovery in the dollar, which hit a record low against the euro just last month, also hurt other commodities, which are priced in the U.S. currency.

Gold prices fell $17.75, or 2.03 percent, to $854.70. The Reuters/Jefferies CRB Index was down 12.12 points, or 3.03 percent, at 387.42.

European shares ended a volatile session with gains. The FTSEurofirst 300 index of top European shares closed 0.8 percent higher at 1,199.02 points.

In Tokyo, Japan's Nikkei average rose 0.3 percent, reversing earlier losses. On the day, the Nikkei gained 43.42 points to end at 13,168.41.