NEW YORK -- U.S. stocks declined yesterday, ending a one-day rally, as unexpectedly strong economic reports combined with the weak dollar to fuel concern over higher interest rates.
Four rounds of computer-guided sell orders also hurt share prices before late rounds of computerized buy orders helped stocks to rebound. Stocks such as automobile and financial service companies that are sensitive to swings in the economy and changes in interest rates were the biggest losers.
Many analysts believe the Federal Reserve is going to raise rates next week when its policy-making council meets.
"They have to respond to the drop in the dollar," said James Kirk, president and chief investment officer of Society Asset Management in Cleveland.
The Dow Jones industrial average slid 15.86, to 3,669.64, after falling as much as 45.64, as General Motors Corp., Aluminum Co. of America and Caterpillar Inc. slumped and yields on the benchmark 30-year Treasury bonds climbed to 7.51 percent from 7.46 percent Monday.
Stocks opened higher, then followed bond prices lower, as signs the economy hasn't yet slowed heightened concern about inflation. The Commerce Department said sales of new single-family homes rose an unexpectedly strong 4.2 percent in May, and the Conference Board, a business research group, said U.S. consumer confidence rose to 92.0 in June from 88.9 in May.
The reports suggested the economy is growing fast enough that the Fed might raise rates for a fifth time this year, said Joseph DeMarco, head of equity trading at HSBC Asset Management, a unit of Hongkong & Shanghai Bank. Higher rates slow the economy, eventually hurting corporate profits, and make bonds relatively more attractive than stocks.
Meanwhile, the Commodity Research Bureau index of 21 key commodity prices, a key inflation barometer, surged 2.72, to 230.49. The index rose as corn and soybeans soared amid
forecasts of extreme heat in the Midwest.
Among broader stock market indexes, the Standard & Poor's 500 index dropped 1.24, to 446.07, and the Nasdaq composite index dropped 0.63, to 702.05, after first rising by 4.31, hurt by declines in Microsoft Corp., Tele-Communications Inc., Snapple Beverage Corp., Nextel Communications Inc. and Worthington Industries.
About seven stocks fell for every four that rose on the New York Stock Exchange. Trading rose to 267.3 million shares from 250.1 million Monday.
Stocks also suffered from renewed weakness in the dollar, traders said, since the Fed may raise rates to support the currency.
The dollar fell to 99.95 Japanese yen, just above its post-World War II record low of 99.46 reached Monday, and also fell against the German mark, to 1.5795.
"We still have a currency market that is very shaky. We do have a micro-crisis of confidence" in U.S. policy, said James Solloway, director of research at Argus Research. "And equity investors are just very skittish and reluctant to place any bullish bets as long as there's the possibility of further damage in the dollar feeding into bonds, which in turn would hurt stocks."
GM fell $1.25, to $51; Ford Motor Co. dropped 62.5 cents, to $59.125; and Chrysler Corp. fell 25 cents, to $47.50.
Among financial service stocks posting large losses yesterday were Federal National Mortgage Association, down $1.625, to $83.375; Merrill Lynch & Co., 62.5 cents lower, at $36; and MBNA Corp., down $1.25, at $23.125.
Bank stocks that saw large losses included NationsBank Corp., down $1.25, to $51.125; Wells Fargo & Co., $2.875 lower, at $152.75; J. P. Morgan & Co., $1.50 lower, at $61.875; and First Chicago Corp., down $1.625, at $47.375.
Retail stocks rallied as the Johnson Redbook Service said June sales are projected to rise a seasonally adjusted 3.6 percent compared with May. Gap Inc. rose $1, to $40.875; J. C. Penney Co. added $1, to $51.125; and AnnTaylor Stores Inc. gained 75 cents, to $38.125.
Novell Inc. rose $1.25, to $16.50. The computer networking company was raised to "buy" from "hold" at UBS Securities Ltd. after the Provo, Utah, company's chief financial officer expressed confidence in its recently acquired WordPerfect division.
American Residential Holding Corp. spurted $3.375, to $21.125.
GTECH Holding Corp. slumped $1.625, to $16.25.