US stocks fell on Thursday as a weakened dollar and a surge in oil prices kindled fresh concerns about inflation, snuffing out a two-day rally that followed the Federal Reserve's deep interest-rate cut. Initial optimism that the Fed's aggressive move would keep the economy out of recession gave way to concerns about the inflationary impact of a flagging dollar, which raises the cost of imported goods.
Banks and brokerages slid, meanwhile, as investors locked in gains booked since the rate cut on Tuesday. Shares of Lehman Brothers Holdings Inc, which rose 10 percent after reporting strong quarterly results on Tuesday, fell 2.8 percent to $62.31.
"The US has cut rates, and so it's less attractive to hold dollars. I think it causes an adjustment in all asset classes denominated by dollars" said Milton Ezrati, senior economic strategist at Lord Abbett & Co, in New York.
A rise in oil prices to a record above $84 a barrel exacerbated inflation concerns, while scattered evidence pointing to a prolonged economic slowdown further soured the mood.
FedEx Corp, a package delivery company whose business serves as an economic barometer, lowered its profit outlook for the full year, citing a tepid economic environment. Its shares dropped 2.9 percent to $104.45, while the Dow Jones trasnport average fell 1.9 percent. The National Retail Federation said US holiday sales are expected to rise at their slowest pace in five years, sending the S&P retail index down 2 percent.
The Dow Jones industrial average was down 48.86 points, or 0.35 percent, to end at 13,766.70. The Standard & Poor's 500 Index was down 10.28 points, or 0.67 percent, to finish at 1,518.75. The Nasdaq Composite Index was down 12.19 points, or 0.46 percent, to close at 2,654.29.
The dollar dropped to a record low against the euro, now worth more than $1.40. While a weakening dollar can give a lift to shares of companies that are big exporters, it also threatens to make inflation worse because of the United States' heavy reliance on imported goods.
Bear Stearns Co Inc shares slipped 0.2 percent to close at $115.46 on the NYSE, reversing an earlier gain of 3.3 percent to a session high at $119.50. The investment bank posted a sharply lower profit but its chief financial officer Sam Molinaro said the worst of times are behind the company. He said he sees business returning to normal in 2008.
But other investment banks' shares dropped, including Morgan Stanley, down 3.6 percent at $64.63. The S&P financial index was down 1.7 percent. The Dow Jones US Home Construction Index, which also rose sharply after the Fed's rate cut, dropped 5.7 percent. Among retailers, shares of Home Depot Inc fell 2.4 percent to $35.32.
Shares of Circuit City Stores Inc plummeted 18 percent to $8.67 after the home electronics seller reported a larger-than-forecast quarterly loss. Oil prices rose above $84 in extended trading as production in the Gulf of Mexico had been shut down as a precaution against a tropical disturbance. October crude, which expired at the close, settled at a record $83.32, gaining $1.39. In electronic trading after the NYMEX open-outcry session ended, October crude hit a record $84.10 a barrel.
Trading was below average on the New York Stock Exchange, with about 1.27 billion shares changing hands versus last year's estimated daily average of 1.84 billion. On Nasdaq, about 1.79 billion shares traded, below last year's daily average of 2.02 billion. Declining stocks outnumbered advancing ones by a ratio of about 12 to 5 on the NYSE and by 18 to 11 on Nasdaq.