The dollar rose to a three-month high against a basket of currencies as investors sought the safety of the U.S. currency, while gold roseto about $1,367 an ounce.
Asian stocks closed mostly lower, while exchange-traded funds that track Korean stocks fell. The widely held iShares MSCI South Korea exchange-traded fund slumped more than 5 percent, while IQ South Korea Small Cap, a more direct investment in the South Korean economy, fell nearly 6 percent.
The $4 billion iShares MSCI South Korea fund, held mostly by U.S. investors, owns large cap blue-chip companies, including well known multinationals Samsung Electronics and Hyundai Motors, which generate significant revenue in the U.S. and overseas, said Michael Johnston, senior analyst at ETF Database.
The $7 million IQ South Korea Small Cap fund, also largely owned by U.S. investors, " is generally seen as more of pure play on the local economy," Johnston said.
Both funds were hit hard in the spring, when a South Korean vessel was shot down, but they clawed back quickly when investors realized tensions weren't escalating, he said. The current situation is perhaps more troubling as North Korea is in the midst of handing over power, which can be a destabilizing time period, he said.
In addition, LCD maker LG Display Company , steel products firm Posco , and telecom company KT were all trading lower.
But fund managers weren't ready to abandon their South Korean investmentsin such big names as Samsung Electronics or Hyundai Motor because of the escalating tensions in Korea, Reuters reported.
Energy shares were also mostly in the red as oil prices slipped below $81 a barrel. ExxonMobil was one of the biggest losers in the Dow, followed by Chevron .
In other news, three more fund companies fell under the scope of the U.S. government's growing insider trading probe, as SAC Capital, Janus Capital and Wellington Management all recieved federal requests for information, the Wall Street Journal and Bloomberg News reported Tuesday. Yesterday, the Federal Bureau of Investigation raided three hedge funds. The move was part of a wider investigation to uncover insider trading crimes in the industry.
In addition, the FDIC reported that banking industry earnings fell by nearly $7 billion in the third quarter, but were better than a year earlier. Net income for the sector was $14.5 billion, down from $21.4 billion in the second quarter, and up from $2 billion in the third quarter last year. The FDIC also reported that the number of institutions with problems continues to rise.
Shares of major banks including JPMorgan , Bank of America and Citigroup were among names that were hit.
JCrew soared more than 15 percent after the apparel maker confirmed it would be purchased by two private equity firms, including its former parent, for about $2.86 billion.
Johnson & Johnson slipped after news the drug maker recalled 4 million packages of children's Benadryland 800,000 bottles of junior-strength Motrin due to manufacturing problems. The recent recall was the latest to hit J&J, which has been plagued by massive recallsof numerous consumer products, such as Children's Tylenol and Motrin, keeping those medicines off pharmacy shelves for months.
Medtronic shares fell after the medical device maker cut its full-year profit forecast as the firm faces slower markets with people postponing treatments.
Campbell Soup slipped after the canned soup producer reported lower that expected earningsas sales slowed.
Meanwhile, Hormel climbed after the producer of Spam canned meat reported higher-than-expected quarterly profit, helped by cost cuts.
Hewlett-Packard shares continued to advance after the tech giant reported profit and revenue beat expectations on Monday. The Dow component also raised its fiscal 2011 revenue and earnings forecasts. In addition, S&P equity raised its target price on the firm to $58 from $54.
Shares of New York Times was up sharply for a second straight session trading on an unusually strong volume. There have been speculations that one of the leading shareholders in the firm is active in the shares at this time, perhaps including Mexican billionaire Carlos Slim or equity firm Harbinger Capital Partners.
The Fed purchased $1 to $2 billion in Treasury securities in its eighth round of bond purchases to stimulate the economy.
Treasury prices ralliedafter the government auctioned $35 billion of 5-year notes, which had a yield of 1.411 percent and a bid-to-cover ratio of 2.65. Auctions of 7-year notes are expected Wednesday.
On the economic front, the Federal Reserve reported that the Federal Open Market Committee considered even more severe measures to ignite the economy, and that members acknowledged the dollar would be affected by a program to stimulate the economy through long-term bond purchases.
Minutes released by the Federal Reserve reveal a sharply divided central bank discussing even greater amounts of easing, while others worried Fed stimulus would spark unwanted inflation.
"A few participants expected that continuing resource slack would lead to some further disinflation in coming years," the minutes said, according to Reuters. "However, a few others thought that the exceptionally accommodative stance of monetary policy, coupled with rising prices of energy and other commodities ... made it more likely that inflation would increase."
In addition, Fed members acknowledged indirectly that a sinking dollar would be among the effects of the Fed's actions. Several Fed members have denied the policy was intended to weaken the dollar's value.
Meanwhile, gross domestic product growth in the third quarter was revised to an annualized rate of 2.5 percentfrom a previous estimate of 2.0 percent, pulled higher by exports and stronger consumer and government spending, the Commerce Department said. The faster pace of growth was not enough to address high unemployment.
Existing home sales fell 2.2 percent to a seasonally adjusted annual unit rate of 4.43 million units from a 4.53 million pace in September, according to the National Association of realtors. Delayed foreclosures and tight lending standards may have played a role in the slowdown.
On Tap This Week:
WEDNESDAY: MBA mortgage apps, durable goods orders, personal income and spending, jobless claims, consumer sentiment, new home sales, oil inventories, 7-yr note auction; Earnings from Deere and Tiffany
THURSDAY: Thanksgiving Holiday — All markets closed
FRIDAY: Black Friday — NYSE early close
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