(Updates with Wall Street close, fresh comment)
By Daniel Bases
NEW YORK, Aug 12 (Reuters) - Global stock markets sagged
and the U.S. dollar rally lost steam on Tuesday as concerns
about the credit-stressed world economy's growth prospects
resurfaced and overshadowed a further decline in oil prices.
Losses stemming from the mortgage crisis in the United
States undercut a two-day surge in U.S. stocks and prompted
investors to lock in some profits.
Bank stocks led the decline after No. 3 U.S. bank JPMorgan
Chase <JPM.N> said it has taken another $1.5 billion in losses
in the current quarter and Swiss bank UBS <UBSN.VX> reported
worse-than-expected losses as a result of the credit crisis.
The dollar index <.DXY>, which tracks the U.S. currency
against a basket of currencies slipped to 76.225, down 0.11
percent on the day. Earlier it hit a six-month high of 76.616,
rising more than 7.4 percent in five weeks.
"The dollar rally has temporarily stalled with players
looking to take profit on recent out-sized moves," said Michael
Woolfolk, senior currency strategist at The Bank of New York
Mellon.
In June, when the dollar was well below its current levels
it helped push exports higher and overpower then record-high
prices for imported oil. That resulted in an unexpected
narrowing of the U.S. Trade deficit to $56.8 billion, down from
a revised estimate of $59.2 in May, data showed on Tuesday.
In response to falling stocks and commodity prices,
government bonds rallied in the United States and Europe. A
drop in oil prices eased some concerns about inflation
pressures but also showed global demand was slowing.
Earlier on Tuesday, European Central Bank Executive Board
member Lorenzo Bini Smaghi told Italian newspaper Il Messaggero
that growth in the European economy is slowing down faster than
expected.
The euro initially fell to a six-month low against the
greenback before recovering ground. It rose to $1.4919 against
the dollar versus $1.4909 <EUR=> late on Monday.
Sterling dropped to a 21-month low near $1.8967<GBP=>
versus $1.9104 late on Monday. Investors sold sterling on the
back of soft retail sales and housing data while ignoring a
surge higher in consumer inflation -- up 4.4 percent on an
annual rate in July.
"We're taking a pause today on the dollar rally, but the
trading volumes have been on the lighter side. Until you see
oil go back up to $118 and gold back above $850, I think the
dollar is still going to have some strength," said one senior
currency dealer at an Asian bank in New York.
If the rest of the global economy is slowing, the rationale
for holding currencies against the U.S. dollar is diminished as
the prospects for lower interest rates erodes the interest rate
yield advantage currently held against U.S. assets.
The latest Philadelphia Federal Reserve Survey of
Professional Forecasters predicts U.S. third quarter gross
domestic product growth dropping to an annual rate of 1.2
percent from the previous estimate of 1.7 percent.
MARKET MOVES
In U.S. trade, the Dow Jones industrial average <> fell
137.43 points, or 1.17 percent, at 11,644.92. The Standard &
Poor's 500 Index <.SPX> lost 15.48 points, or 1.19 percent, at
1,289.84. The Nasdaq Composite Index <> dropped 9.34
points, or 0.38 percent, at 2,430.61.
"The market has had a pretty good rally in the last few
days. It got about 8 percent off the lows, so there's possibly
some profit taking in the banking sector, with the lowering of
earnings forecasts for Goldman Sachs," said Steve Goldman,
market strategist at Weeden & Co in Greenwich, Connecticut.
JPMorgan said in a regulatory filing it expects continued
deterioration in credit trends for its consumer portfolios and
that could require additional allowances for loan losses.
UBS's worse-than-expected second quarter loss was the
result of fresh write-downs and a wave of client withdrawals
that prompted the bank to say it will split off its investment
banking unit.
JPMorgan shares fell 9.21 percent in New York while UBS
shares closed down 2.42 percent in Europe.
European shares closed down. The FTSEurofirst 300 index
<> of top European shares fell 0.33 percent to 1,208.89.
Investors moved from stocks into the relative safety of
government bonds, boosting the benchmark 10-year U.S. Treasury
note 22/32 in price, pushing the yield down to 3.9144 percent.
Euro zone government bonds rose in thin trading conditions.
Two-year bond yields <EUTYT=RR> eased 4.8 basis points on the
day to 4.050 percent -- 20 basis points below the ECB's 4.25
percent benchmark interest rate -- while 10-year yields
<EU10YT=RR> slipped 3.3 basis points to 4.233 percent.
Oil prices fell for a third straight session in seesaw
trading as persistent concerns about slowing demand balanced
against a stronger U.S. currency.
U.S. crude <CLc1> fell $1.10 a barrel to $113.35 despite
concerns over supply disruptions stemming from the
Russia-Georgia conflict. Oil is down from a peak on July 11 by
more than 23 percent.
Gold prices fell to 8-month lows of $801.90 an ounce before
recovering to $815, still below Monday's late New York trade of
$819.25. The precious metal is down more than 20 percent since
hitting a record high of $1,030.80 on March 17.
Japan's Nikkei <> earlier closed down 127.31 points,
or around 1 percent to end at 13,303.60, after rising 2 percent
the previous day. The broader Topix <> shed 0.7 percent to
1,271.42. Companies linked to growth in emerging economies fell
sharply on concern about slowing growth in China.
China's main stock index sank to a fresh 19-month closing
low on Tuesday. The Shanghai Composite Index <> fell 0.52
percent to close at 2,457.198 points, extending Monday's 9.4
percent slide over the two previous trading days on concerns
about corporate profit growth.
(Additional reporting by Vivianne Rodriques, Ellis Mnyandu and
John Parry in New York, Jeremy Gaunt in London, Samuel Chen in
Shanghai. Editing by Richard Satran)
