NEW YORK Wall Street closed out its worst week since June on Friday, pulling back from record highs as investors focused on when the Federal Reserve will start to wind down its stimulus program, while the dollar rebounded from a seven-week low.
U.S. stocks ended modestly lower as investors found few catalysts in light volume. For the week, the S&P 500 lost 1.1 percent, after several Fed officials alluded to a decline in stimulus before long. The Fed's support has been a major driver in the rally that has pushed the S&P 500 up more than 18 percent so far this year.
"People are looking ahead to the September FOMC meeting and the prospect that the Fed begins its long-awaited exit strategy," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.
The dollar rebounded slightly on Friday from recent losses, but it ended the week about 1 percent lower. The dollar index .DXY gained 0.2 percent on Friday.
Investors have been betting heavily on dollar strength in recent months, expecting that Fed plans to reduce bond purchases, along with the relative outperformance of the U.S. economy against other markets, would bolster the dollar and drive U.S. yields higher.
The repositioning in these trades dominated moves this week in currencies, bonds and foreign stocks. Along with the big bet on the dollar, bets on Japanese stocks, a falling yen and higher U.S. bond yields were all hit hard this week, causing investors to cover these positions ahead of what looks to be a seasonally slow period in the next two weeks.
Better-than-expected economic figures in Europe have supported the euro and sterling of late. Britain's trade deficit narrowed sharply, supporting the pound, which traded close to the Thursday level of $1.5574 that was its strongest since June 19.
Bond prices were little changed on Friday. The 10-year Treasury note edged up 4/32 in price, to yield 2.578 percent. However, yields are still sharply lower than the levels seen just before the release on August 2 of the monthly U.S. jobs report, which disappointed investors.
The Fed has said it will reduce its $85 billion in monthly mortgage-backed securities and Treasury bond purchases later this year if the economy progresses as expected.
Dallas Fed President Richard Fisher reiterated on Thursday that the central bank remained open to trimming its purchases from September if economic data keeps improving. There was no fresh information on Friday.
Signs of stabilization in China's economy supported European stocks, which closed up more than half a percent, and the data also pushed crude prices higher.
Investors pulled a record $3.27 billion out of U.S.-based funds that hold Treasuries in the latest week, data from Thomson Reuters' Lipper service showed. The outflow from Treasury funds in the week ended August 7 was the biggest since Lipper's records began in 1992.
The Dow Jones industrial average .DJI ended down 72.81 points, or 0.47 percent, at 15,425.51. The Standard & Poor's 500 Index .SPX was off 6.06 points, or 0.36 percent, at 1,691.42. The Nasdaq Composite Index .IXIC lost 9.02 points, or 0.25 percent, at 3,660.11.
But Europe's broad FTSE Eurofirst 300 index .FTEU3 gained 0.6 percent as the data out of China lifted stocks of mining companies higher. World shares .MIWD00000PUS were flat.
Upbeat Chinese data in the past two days helped ease investor concerns that a sharp slowdown in the world's second-largest economy could derail global growth.
China said factory output rose 9.7 percent in July, beating forecasts, and retail sales grew 13.2 percent while inflation held steady. The data added to Thursday's trade figures showing exports from China running at a surprisingly strong pace.
The promising numbers, along with supply disruptions in the Middle East, lifted Brent oil above $108 a barrel. Brent was up $1.52 to $108.20 a barrel, while U.S. crude gained $2.70 to $106.10.
(Additional reporting by Richard Hubbard in London, Caroline Valetkevitch and Julie Haviv in New York; Editing by Leslie Adler)
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