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Markets Before FOMC

 Renewed support for the U.S. dollar drove the Dollar Index to a fresh two-month high and led to broad-based weakness in the stock market. The greenback pulled back a bit, but it still settled with a 0.7% gain against competing currencies. The move comes ahead of tomorrow's FOMC policy statement, which will be of primary focus as participants look for hints about any potential tightening of monetary policy.

Some have been concerned that the Fed's loose monetary policy will inevitably give way to runaway inflation, but others argue that is unlikely amid persistently weak labor markets. However, many made note that the November Producer Price Index increased 1.8% month-over-month, which is much sharper than the 0.8% increase that had been widely forecast. Excluding food and energy, November producer prices increased 0.5% month-over-month, which is stronger than the 0.2% that had been expected.

The Empire Manufacturing Index for December proved disappointing. It came in at 2.55, which is far below the 24.00 that had been forecast following the 23.51 that was posted in November.

Disappointment over the developments helped drive nine of the 10 major sectors in the S&P 500 to losses. Pressure was most intense against financials, which fell 1.7%. Regional banks were a primary source of weakness in the sector -- they dropped 3.6%.