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Market Insider: Watch The Dollar

Markets head into the last session before the three-day Memorial Day weekend, with a wary eye on the dollar and interest rates.

The Dow fell for a third day, tumbling 129 to, or 1.5 percent, to 8292. It was the biggest drop since May 13 and it is now on the longest losing streak since March 3, just before the rally began. The S&P 500 was off 15, or 1.7 percent, to 888. The Nasdaq fell 1.9 percent to 1695.

From 'Fast Money':

"It certainly feels like the party's ending," said one trader, as the Dow traded off 200 points in the midafternoon. He noted that the dollar, Treasurys and equities were all moving lower in tandem, a negative sign for stocks. Some traders said the stock market's ability to throw off its worse losses of the day suggests the possibility of more consolidation, in a likely sideways trade.

Friday's market has no economic data of note, and the bond market closes early. Some late day movers may get attention. Campbell Soup reported earnings increased 12 percentand raised its forecast for the year. Sears and Gap both traded higher after the bell Thursday on better-than-expected earnings.

AIG may also generate some interest after news late Thursday that CEO Edward Liddy is stepping down, once a replacement is found.

Also Friday, President Obama signs the credit card bill into law. Fed Chairman Ben Bernanke makes remarks at 2 p.m. as commencement speaker at Boston College Law School.

Markets Mayhem

The excitement Thursday was in the Treasury and foreign exchange markets, where bonds and the dollar reversed course in a late morning sell off. The dollar, rallying early, turned and fell nearly 1 percent against the euro, taking it to $1.3905 per euro, a level last seen Jan. 1. Against the yen, it lost about a half percent. Commodities were mixed, with oil lower at $61.05 per barrel, but gold rose 1.5 percent at $950.80 per troy ounce.

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The 10-year fell sharply, losing 1-9/32 to 98-2/32. Its yield finished at 3.355 percent, its highest level since Nov. 19, up from 3.204 percent the day earlier.

"The selling really came in when people looked at the results of the Fed purchase in five-years. There was a huge amount of securities offered," said Brian Edmonds, head of interest rate trading at Cantor Fitzgerald.

The Fed purchased just $7.4 billion in notes while it was offered more than $45 billion. Some traders were anticipating the Fed would increase its purchases, as it suggested it might in its FOMC minutes Wednesday. The market also reacted to concerns of too much supply coming to market. There is another $101 billion in notes expected at auction in the coming week.

    • Trading the Dow? Look to the Nasdaq for Leads!

As the selling increased in Treasurys, traders speculated the U.S. could be at risk of losing its triple A credit rating. Earlier, S&P put the U.K. on outlook negative, and there is concern the U.S. will be next.

"That certainly got some traction," said Edmonds. "As the market began to sell off , there was definitely fast money selling at the long end of the curve. It's just one of the wallops that we're getting used to in this market."

S&P, in response to a press inquiry, reiterated its January statement on the U.S. At the time, it affirmed the U.S. rating but said fiscal risk increased though the deterioration is temporary. A Moody's spokesman said the U.S. rating remains triple A and stable.

Pimco's Bill Gross added to the speculation on the U.S. credit rating. He said, in an interview on "Street Signs," that the market views a downgrade of the U.S. as an increasing possibility. He said the U.K. and U.S. markets are viewed as "relative twins" and both countries are moving in the direction of higher debt. He said the parallel sell offs in the dollar, Treasurys and equities was a statement that markets didn't want to hold U.S. assets Thursday.

Mark Zandi of Moody's Economy.com said though that he thinks the U.S. rating is safe. "I'm not speaking as a Moody's analyst. I'm an economist. The triple A rating is not an issue," he said in a telephone interview.

The Fed, however, could be pressured to be more aggressive with Treasury purchases. "At the end of the day, if the yields continue to rise, I think the Fed will step on the accelerator and buy more, and buy more than they've committed to already," Zandi said.


Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.