Stronger dollar weighs on oil; Dow drops 1 percent

NEW YORK (Reuters) - The U.S. dollar rose to a more than two-week high against a basket of currencies on Friday following strong U.S. economic data, putting pressure on oil prices, which fell after three days of gains.

Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt, Germany, May 12, 2016. REUTERS/Staff/Remote

Wall Street closed lower, with the Dow down 1 percent, as oil’s decline dragged on energy shares. [.N]

U.S. retail sales in April recorded their biggest increase in a year as Americans stepped up purchases of automobiles and other goods, suggesting the economy was regaining momentum.

But countering that optimism were tepid quarterly results from department store operators Nordstrom and J.C. Penney, following weak reports from other retailers earlier in the week.

The S&P consumer discretionary sector fell 1.1 percent and consumer staples shares dropped 1.2 percent.

“Certainly this week there were enough data points that caused some concern with investors regarding the health of the consumer and, ergo, the health of the overall economy,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana.

The Dow Jones industrial average fell 185.18 points, or 1.05 percent, to 17,535.32, the S&P 500 lost 17.5 points, or 0.85 percent, to 2,046.61 and the Nasdaq Composite dropped 19.66 points, or 0.41 percent, to 4,717.68.

The S&P and Dow inked their third straight weeks in the red, while the Nasdaq recorded a fourth straight negative week.

“We have had a week of mixed data, ongoing concern about domestic and global growth, and there just hasn’t been a reason for buyers to come in,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

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The pan-European FTSEurofirst 300 index gained 0.6 percent, rebounding from losses earlier in the session after the U.S. retail sales report.

Germany’s economy more than doubled its expansion rate in the first quarter as spending picked up.

MSCI’s broad index of global shares dropped 0.9 percent.

The global index, which fell for a third straight week, is off more than 1 percent for 2016. Concerns about the global economy persist and investors are responding to diverging policies between the Federal Reserve and other major central banks.

Along with the positive retail sales report, the University of Michigan said its consumer sentiment index surged 6.8 points to 95.8 early this month, the highest reading since last June.

Following the upbeat economic data, the dollar was up 0.5 percent against a basket of currencies.

The retail sales report “is likely to rekindle arguments from the hawkish camp in the ongoing debate among policy makers about why the Federal Reserve should consider maintaining its rate normalization efforts,” said Samarjit Shankar, head of iFlow and quant strategies at BNY Mellon in Boston.

A three-day run-up for oil prices came to a halt, hurt by the stronger dollar and investors cashing in on recent gains. A stronger U.S. currency weighs on greenback-denominated commodities such as oil futures.

Losses were cushioned, however, by oil production outages in Nigeria that have slashed output there to the lowest in more than two decades.

Brent crude futures settled down 0.5 percent at $47.83 a barrel. U.S. crude settled 1 percent lower at $46.21, after touching a six-month high on Thursday.

Oil prices have recovered some ground after touching 12-year lows earlier in 2016.

In the U.S. government debt market, the yield curve flattened the most in two months after the data. Short- and intermediate-dated debt underperformed long-dated bonds after the data.

Benchmark 10-year notes were last up 17/32 in price to yield 1.7001 percent, down from 1.76 percent late on Thursday.

Additional reporting by Patrick Graham in London and Gertrude Chavez-Dreyfuss, Devika Krishna Kumar and Karen Brettell in New York; Editing by Dan Grebler and James Dalgleish