Wall St set for worst week since June, dollar rises

By Leah Schnurr

NEW YORK (Reuters) - Wall Street was on track for its worst week since June as investors focused on when the Federal Reserve might wind down its stimulus program, while the dollar rebounded from a seven-week low on Friday.

Signs of stabilization in China's economy supported European stocks, however, which closed up more than half a percent, and the data also pushed crude prices higher.

Comments from Fed officials this week that indicated a desire to start cutting bond purchases gave traders a reason to pull back from last week's records.

The repositioning of trades built up around the Fed's bond-buying program has been a factor in market moves this week, along with the lighter volume heading into the end of summer.

The uncertainty prompted investors to pull a record $3.27 billion out of U.S.-based funds that hold Treasuries in the latest week, data from Thomson Reuters' Lipper service showed. The outflow from Treasury funds in the week ended August 7 was the biggest since Lipper's records began in 1992.

Bond prices were little changed on Friday as investors took profits on the week's gains. The 10-year Treasury note edged up 1/32 in price, to yield 2.580 percent.

U.S. stocks were modestly lower in the afternoon as investors found few catalysts in light volume, prompting traders to pull back from last week's records. The Fed's stimulus has been a major driver in the equity rally this year that has pushed the S&P 500 up about 18 percent.

"They are basically saying we have pumped the market full of liquidity for the last five and a half years and given you a fantastic stock market and now you are going to have to stand on your own two feet," said Uri Landesman, President, Platinum Partners in New York.

"Until the market proves it can do that, it is going to be a lot easier to do that from a lower level and that is what is going to happen."

The Fed has said it will reduce its $85 billion in monthly mortgage-backed securities and Treasury bond purchases later this year if the economy progresses as expected. Dallas Fed President Richard Fisher reiterated on Thursday that the central bank remained open to trimming its purchases from September if economic data keeps improving. There was no fresh information on Friday to help clarify the situation.

The uncertainty had driven the dollar lower this week but the currency rebounded on Friday with the dollar index gaining 0.2 percent.

"The market was very long of U.S. dollars assuming the Fed would taper sooner rather than later, and the Fed has pushed back against that," said Jane Foley, senior currency strategist at Rabobank.

The Dow Jones industrial average dropped 71.45 points, or 0.46 percent, to 15,426.87. The Standard & Poor's 500 Index slipped 4.97 points, or 0.29 percent, to 1,692.51. The Nasdaq Composite Index was off 4.92 points, or 0.13 percent, to 3,664.21.

But Europe's broad FTSE Eurofirst 300 index gained 0.6 percent as the latest data out of China lifted stocks of mining companies higher. World shares were flat.

The run of upbeat Chinese data in the past two days has helped to ease investor concerns that a sharp slowdown in the world's second-largest economy could derail global growth.

China said factory output rose 9.7 percent in July, beating forecasts, and retail sales grew 13.2 percent while inflation held steady. The data added to Thursday's trade figures showing exports from the Chinese economy running at a surprisingly strong pace.

The promising numbers lifted Brent oil above $108 a barrel as did supply disruptions in the Middle East. Brent was up $1.37 to $108.05 a barrel, while U.S. crude gained $2.77 to $106.17.

(Additional reporting by Richard Hubbard in London, Chuck Mikojacjzak and Julie Haviv in New York; Editing by James Dalgleish)