Dollar up, stocks sputter on economic caution

NEW YORK (Reuters) - The U.S. dollar rebounded while U.S. stocks retreated on Tuesday after initial gains were overshadowed by cautious outlooks on the economy from corporate executives and Federal Reserve Chairman Ben Bernanke.

U.S. government debt prices rose sharply on Bernanke’s sober assessment of a sluggish recovery and comments that an easy money policy would likely be needed for an extended period..

Crude oil touched a two-week high above $65 a barrel as a slew of rosy corporate earnings reports fed into hopes for an economic recovery that could revive global energy demand. But oil later traded lower for the day.

Risk appetite had increased in the past few days after stronger-than-expected U.S. corporate earnings. The latest to report higher-than-expected quarterly results was manufacturer and Dow component Caterpillar Inc CAT.N on Tuesday.

But Caterpillar’s shares were far off the day’s highs after the company said it expects the third quarter to be the weakest of the year and “extremely challenging.

United Technologies Corp UTX.N, meanwhile, lowered its 2009 forecast, and the company's top executive said he does not anticipate a significant economic recovery in 2010.

Earnings driven by cost-cutting were not enough to satisfy investors looking for higher revenue growth.

“The story (UTX and Caterpillar) put out there is, ‘We have done a great job cutting costs, we’ve done a great job managing our business and here’s a bottom line beat.’ I don’t think that’s enough to get this market going,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

“If we don’t get some revenue beats this party is going to end real quick, especially given how overbought we are.”

The Dow Jones industrial average .DJI dipped 4.98 points, or 0.06 percent, to 8,843.17 in afternoon trading. The Standard & Poor's 500 Index .SPX dropped 4.98 points, or 0.52 percent, to 946.15. The Nasdaq Composite Index .IXIC fell 11.29 points, or 0.59 percent, to 1,898.00.

European stocks rose for a seventh straight session, led by mining and energy shares. The FTSEurofirst 300 .FTEU3 index of top European shares advanced 0.8 percent to 888.18 points -- its highest close since January 6. The FTSE 100 .FTSE closed 37.55 points higher at 4,481.17 in London.

“I think as much as anything there’s a bit of a momentum effect, which has given our markets a bit of a push,” said Richard Hunter, head of UK equities at Hargreaves Lansdown.

Bernanke, testifying before the House Financial Services Committee, said U.S. unemployment was likely to remain high into 2011, which he warned could undermine consumer confidence and derail a recovery.

Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Connecticut, said Bernanke’s “cautious tone” threw the dollar a lifeline, especially against the euro, which earlier climbed to its highest level since early June.

“His bottom-line assessment that the U.S. economy is still nowhere near ready for a policy reversal flew in the face of equity market investors who have been busily discounting a return to growth,” said Wilkinson.

The dollar was up against a basket of major currencies, with the U.S. Dollar Index .DXY up 0.10 percent at 78.987.

The euro was down 0.34 percent at $1.4178, while against the yen, the dollar was down 0.80 percent at 93.44.

Bernanke’s testimony indicated interest rates would remain low for the time being, lifting both U.S. and euro zone government debt prices.

The benchmark 10-year U.S. Treasury note was up 39/32 in price to yield 3.46 percent. The 2-year U.S. Treasury note was up 5/32 in price to yield 0.89 percent.

High-yielding euro zone government bonds continued to outperform core German debt supported by the pickup in risk appetite over the past week, keeping bond yield spreads at their tightest in months.

The 10-year Bunds were off 2.5 basis points at 3.379 percent, with two-year Schatz yields down a similar amount at 12.61 percent.

The early gains in the oil market came alongside a broad rally in global equities markets.

U.S. light sweet crude oil fell 14 cents to $63.84 a barrel.

Spot gold prices fell $3.05 to $945.30 an ounce.

Asian shares edged up to another 10-month peak after strong company earnings. The MSCI index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up 0.4 percent. Japan's Nikkei average .N225 rose 2.6 percent.

Reporting by Rodrigo Campos, Gertrude Chavez-Dreyfuss, Burton Frierson in New York; Kirsten Donovan, Barbara Lewis and David Sheppard in London and Peter Starck in Frankfurt; writing by Herbert Lash; Editing by Kenneth Barry