Stocks tottered in search of direction Wednesday as investors remained confident the Federal Reserve will lower rates next week, but tread cautiously amid record-high oil prices and a sinking dollar.
Wall Street widely expects the central bank next Tuesday to lower the benchmark federal funds rate by a quarter percentage point. The decision has not been guaranteed, though, and furthermore, many investors worry that a quarter-point rate reduction might not be enough to address the market's woes.
Trading has been extremely volatile since the middle of the summer as investors try to gauge the chance of a rate cut and the economy's strength amid an ongoing housing slump and credit market problems.
Recently, crude oil's surge to record highs due to tightening supplies and a weakening dollar have rekindled concerns about inflation's effect on growth. Accelerating inflation is not only a threat to consumer spending - a pillar of the economy that Wall Street fears is weakening - but it also gives the Fed a reason to keep rates where they are.
Jack A. Ablin, chief investment officer at Harris Private Bank, pointed out that price surges in commodities hit Americans particularly hard because they're denominated in the dollar - which is at a record low versus the euro.
''I think the Fed has to pay attention to this. They need as much elbow room as they can to make a decision they feel is right,'' Ablin said. ''Should this dollar continue to fall, it has the potential to limit the Fed's ability to respond to the economy.''
However, inflationary concerns are partially offset by the belief that strong global demand is driving costs, and the fact that higher energy prices help boost the profits of oil and gas companies. Over the last four weeks, the energy sector has advanced about 7 percent, boosted by increasing energy prices.
The Dow Jones industrial average rose 3.58, or 0.03 percent, to 13,311.97, weaving in and out of positive territory after soaring 180 points on Tuesday.
Broader stock indexes also gained slightly. The Standard & Poor's 500 index futures rose 1.79, or 0.12 percent, to 1,473.28, and the Nasdaq composite index rose 6.84, or 0.26 percent, to 2,604.31.
The Nasdaq got a lift from medical device maker Cardica Inc., which received a key European approval for a gadget that connects blood vessels during heart bypass surgery. Cardica shares surged $1.57, or 18 percent, to $10.21.
Bond prices slipped. The yield on the 10-year Treasury note, which moves opposite its price, rose to 4.41 percent from 4.37 percent late Tuesday.
The dollar extended its slide against the euro, hitting a new record low amid expectations of a rate cut, which would make the U.S. currency a less attractive investment vehicle. The 13-nation euro rose as high as $1.3901 in late European trading, surpassing its previous record of $1.3852 reached July 24.
The dollar also weakened against the yen - an important currency for the stock market because of the yen carry-trade, where people invest their yen in higher-yielding dollar assets. When the dollar falls against the yen, people tend to exit these positions.
Commodity prices in several markets stayed in record territory Wednesday after the U.S. government report declines last week in crude and gasoline supplies. Crude oil briefly spiked above $79 a barrel, a new intraday trading high. Gold also rose, and so did wheat - which on Tuesday finished just shy of $9 a bushel, an all-time peak.
As Americans deal with rising food and energy costs, the housing and credit markets remain far from recovery. Treasury Secretary Henry Paulson said Wednesday that financial market turmoil will take some time to be resolved, especially in the area of subprime mortgages.
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