Stocks fall sharply as dollar sinks

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NEW YORK -- Wall Street suffered its second big drop in a week Wednesday, with investors worried about spreading fallout from the credit crisis at banks and about a dollar that just keeps getting weaker. The Dow Jones industrial average fell more than 360 points -- just about matching its plunge of last Thursday.

A passel of worries tormented investors, including the dollar, which swooned amid speculation that China will seek to diversify some of its foreign currency stockpiles beyond the greenback. Meanwhile, a record loss from General Motors Corp. owing to an accounting adjustment further dragged on sentiment.

Oil traded above $98 per barrel for the first time before retreating, and gold pushed higher, moves exacerbated by an anemic dollar.

The 13-nation euro hit a fresh record against the dollar -- rising to $1.4729 -- before falling back. The dollar fell not only against the euro but in Asia following a report that a senior Chinese political figure said China should diversify its $1.43 trillion foreign exchange reserves into the euro and other strong currencies.

The fear with a huge drop like Wednesday's is whether it is part not just of a correction, which is a 10% pullback in stock prices, but that it could be the beginning of a bear market. With the huge volatility that has swept Wall Street since the summer, and triple-digit moves in the Dow becoming commonplace, no one can be sure.

Still, the concern on the Street is that the extent of the fallout from the credit market crisis that has led to billions of dollars in losses for major banks and investment firms is not yet known. With Citigroup Inc. announcing Sunday it needed to take an additional $8 billion to $11 billion in writedowns, investors are very uneasy not just about stocks, but the economy as a whole.

"The financials are the bodyguards of the market and when the bodyguards are taking shots then the market can't do well," said David Darst, chief investment strategist for Morgan Stanley's global wealth management group.

"A lot of the bad stuff is known, what the markets are worrying about is the unknown," Darst said.

According to preliminary calculations, the Dow fell 360.92, or 2.64%, to 13,300.02. The Dow, which had gained 117 points on Tuesday, had fallen 362.14 last Thursday, reflecting the extreme fractiousness on Wall Street these days.

Broader stock indicators also pulled back Wednesday. The Standard & Poor's 500 index fell 44.65, or 2.94%, to 1,475.62 -- moving below the psychological benchmark of 1,500. The Nasdaq composite index fell 76.42, or 2.70%, to 2,748.76.

The Russell 2000 index of smaller companies fell 25.81, or 3.22%, to 775.96.

A drop in the NYSE composite index proved steep enough to trigger trading curbs, which puts restrictions on certain kinds of sell orders and are meant to help stabilize the market.

The euro's rally put it well above the $1.4554 the currency bought late Tuesday in New York. The previous record high, also set Tuesday, was $1.4571.

Government bonds jumped as the dollar fell and as investors transferred money from stocks to fixed-income investments. The yield on the 10-year Treasury note, which moves opposite its price, fell to 4.34% from 4.37% late Tuesday.

The pullback in some stocks made clear the urgency of some investors' concerns about balance sheets.

Washington Mutual Inc. fell after the bank warned that it expects loan defaults to continue in the first quarter at the same pace as in the present quarter. Additionally, New York Attorney General Andrew Cuomo stepped up claims that the bank shares blame for inflated home prices nationwide. WaMu fell $4.19, or 17.3%, to $20.04.

In addition, American International Group fell $4.15, or 6.7%, to $57.90 ahead of a quarterly financial report due after the closing bell.

Other names in the financial arena fell as well. American Express Co. fell $3.20, or 5.5%, to $55.37. Citigroup, which like AIG and American Express is one of the 30 stocks that make up the Dow industrials, fell $1.67, or 4.8%, to $33.41. Morgan Stanley fell $3.32, or 6.1%, to $51.19.

Illustrating investors' unease, the Chicago Board Options Exchange's volatility index, known as the VIX, and often referred to as the "fear index," spiked, jumping 24%.

The weak dollar helped keep pressure on the price of oil. Light, sweet crude fell 33 cents to settle at $96.37 per barrel on the New York Mercantile Exchange after the goverment reported inventories fell less than expected last week while refinery utilization remained flat.

December gold rose but also came off its highs, adding $10.10 to settle at $833.50 an ounce on the Nymex.

Comments from Federal Reserve officials didn't give investors much reason to reconsider their bets. Atlanta Fed President Dennis Lockhart warned that the U.S. economy will likely weaken amid a further pullback in housing and a pullback in spending by consumers watching their homes lose value on paper.

Richmond Fed President Jeffrey Lacker said the Fed seems to be walking an appropriate line between aiding the markets but allowing Wall Street to reasses some risk -- dimming some investors' hopes for an interest rate cut when the Fed meets in December.

For his part, St. Louis Fed President William Poole said recent weeks have seen the credit markets make progress in recovering from recent tightness.

"We've been seeing a bit of a tug of war," said Tim Swanson, chief investment officer at National City's Private Client Group. "On one side we've got the forces of globalization and on the other side we've got woes from housing and largely related credit concerns," he said.

"As we see volatility on a day-by-day basis it's these two forces duking it out trying to see which ultimately will prevail."

Beyond broader economic concerns, some corporate news didn't offer Wall Street much reason for cheering. GM reported a $39 billion loss for the third quarter due to an accounting shift. The company warned late Tuesday it would book a $38.6 billion noncash charge largely related to establishing a valuation allowance. A valuation allowance is taken when the future benefit of the deferred tax assets is less likely to be realized.

GM's loss came to $68.85 per share, compared with a loss of $147 million, or 26 cents per share, in the third quarter a year earlier. The stock fell $2.21, or 6.1%, to $33.95.

Declining issues outnumbered advancers by about 10 to 1 on the New York Stock Exchange, where volume came to 1.66 billion shares compared with 1.50 billion shares traded Tuesday.

Overseas, Japan's Nikkei stock average closed down 0.94%. Britain's FTSE 100 fell 0.85%, Germany's DAX index fell 0.35%, and France's CAC-40 fell 0.46%.
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