GLOBAL MARKETS-Dollar hits five-week low on Fed caution, Wall St sags

Fri Jul 26, 2013 12:54pm EDT

* Wall Street lower as profit taking sets in
    * Gold falls with drop in dollar
    * Oil declines on worries over demand in China


    By Leah Schnurr
    NEW YORK, July 26 (Reuters) - The dollar fell to a five-week
low on Friday on expectations that the Federal Reserve at its
upcoming policy meeting will underline its intention to keep
interest rates low for a long time, while stocks fell as
investors took profits as they await new signals on the
economy's path.
    The drop in the dollar pulled gold lower, though bullion was
still on track for a third week of gains. But oil, which
typically benefits from a weaker dollar, declined on worries
about falling demand in China, the world's second largest energy
consumer.
    The dollar has tumbled this month as Fed officials moved to
soothe concerns about its stimulus withdrawal plans, while
equities markets have recovered.
    Setting the greenback on its latest fall was a Wall Street
Journal report published online Thursday that the Fed, which
will begin a two-day policy meeting on Tuesday, may debate
tweaking its forward guidance message to hammer home its signal
that it will not be raising rates any time soon.
    Against a basket of currencies the dollar was down
0.4 percent. The greenback earlier hit 81.548, its lowest level
since June 20 and just above chart support at 81.506, its
200-day moving average.
    In addition to the Fed's meeting, the market tone next week
could be determined by a round of economic indicators,
culminating in the U.S. government's monthly report on non-farm
payrolls on Friday.
    "Folks are just treading water. They just want to see the
big numbers next week to get some directional guidance," said
Samarjit Shankar, director of market strategy at BNY Mellon in
Boston.
    The dollar's slide began on July 10, when minutes of the
Fed's June meeting gave investors second thoughts about when the
U.S. central bank would start reducing stimulus. 
    Last month the Fed said it expects to start slowing down the
pace of its $85 billion in monthly bond purchases later this
year. Chairman Ben Bernanke has since stressed that the timeline
is not set in stone and could change if the economic outlook
shifts, comments that soothed Wall Street and the bond market.
    The dollar's weakness on Friday pushed the euro to a
five-week high of $1.3296. But it erased gains to last trade at
$1.3274, slightly lower on the day.
    U.S. stocks were lower in midday trading as investors took
in a busy week of earnings results. Among the major companies to
report, shares of Amazon.com rose 1.6 percent, even
though it gave a forecast for income and revenue below Wall
Street views as the company spends billions of dollars on
expansion. More than a half dozen investment banks raised their
share price targets on Amazon on Friday.
    With the S&P 500 up about 18 percent for the year, Friday
provided an opportunity for modest profit taking.
    For the week, the S&P is down about 0.5 percent, its first
down week in five, but the index is up 4.7 percent so far this
month, its best month since January. The Nasdaq is up 5.5
percent for July so far, its best monthly gain in a year and
half.
    "It's not uncommon for short-term traders to lock a little
bit of profits, especially after everyone had a terrible June,"
said Paul Zemsky, head of asset allocation at ING Investment
Management in New York. June was the first negative month for
U.S. stocks since October.
    The 10 major industry sectors on the S&P 500 fell and all
but three components of the Dow industrials were also down.
Zemsky pointed at the broad decline as an indication of
profit-taking.
    The Dow Jones industrial average fell 93.69 points,
or 0.60 percent, to 15,461.92. The Standard & Poor's 500 Index
 slipped 7.06 points, or 0.42 percent, to 1,683.19. The
Nasdaq Composite Index was off 6.47 points, or 0.18
percent, to 3,598.71.
       
 
    The pan-regional FTSEurofirst 300 provisionally
closed down 0.3 percent, making for its first weekly drop in
over a month. World stocks slipped 0.3 percent. 
    Nevertheless, it was a milestone day for Europe, marking one
year since ECB President Mario Draghi's "Whatever it takes"
speech that turned the tide in the euro zone debt crisis.
    Italy and Spain have seen their two-year bond yields fall
from 5 and 6.4 percent, respectively, before Draghi's speech to
under 2 percent, saving them immense amounts in interest
payments.
    Gold slipped but was still on course for a third
weekly gain. Spot gold fell about 1 percent on the day to
$1,318.30 per ounce as buyers cashed in on the day's $1,340
peak, around $150 up from the three-year low hit on June 28.
    Brent futures for September LCOc1 dropped 71 cents to
$106.94 per barrel after posting a 46-cent gain on Thursday.
U.S. light crude for September was down $1.04 cents at
$104.45 a barrel.
    Oil prices were hit by worries over demand from China after
China's industry ministry ordered companies across 19 industries
to close outdated capacity by the end of September.