NEW YORK (CNNMoney.com) -- Stocks closed lower Wednesday as the dollar strengthened on fears tied to the growing fiscal crisis in Europe and a dour report on U.S. sales of new homes raised concerns about the economic recovery.
The Dow Jones industrial average (INDU) fell 53 points, or 0.5%. The S&P 500 index (SPX) slid 6 points, or 0.5%. The Nasdaq composite (COMP) dropped 16 points, or 0.7%. All three indexes remain near the highest levels since late September 2008.
Stocks opened lower after ratings agency Fitch cut Portugal's sovereign credit rating one notch, reigniting concerns that the debt problems of struggling European economies like Greece are spreading and could hurt stronger members of the European Union.
The downgrade battered the euro, which fell to a 10-month low versus the dollar. The stronger greenback weighed on commodity prices, driving oil down 1.7%.
Stocks were also pressured by weaker-than-expected reports on new-home sales and durable goods orders. But analysts said the data are consistent with an economic recovery, albeit an uneven one.
Despite Wednesday's retreat, stocks have been generally moving higher over the last several weeks. On Tuesday, all three major indexes closed at new 18-month highs as investors cheered a better-than-expected report on home resales.
"We had a nice run-up since the beginning of the week," said Peter Cardillo, chief market economist at Avalon Partners. "Considering the negative news out of Europe, the strength of the dollar and the decline in commodity prices, the market is not doing too bad."
Cardillo said investors were also focused on the bond market, where a lackluster auction of 5-year Treasury notes raised concerns about budget deficits and fiscal policies in the United States. The yield on the benchmark 10-year note jumped to 3.83% from 3.68% as prices sank.
Meanwhile, investors are bracing for testimony Federal Reserve Chairman Ben Bernanke is due to deliver Thursday before the House committee on financial services.
Bernanke is expected to discuss how the central bank plans to eventually unwind some of its emergency liquidity facilities as the economy continues to show signs of a gradual recovery.
"Volatility could be expected during his testimony as traders hang on every word," said Dan Cook, senior market analyst at IG Markets.
In addition, investors will take in quarterly results Thursday from Best Buy (BBY, Fortune 500) and ConAgra (CAG, Fortune 500) before the opening bell. Oracle (ORCL, Fortune 500) reports after the market closes.
Portugal: Fitch cut Portugal's credit rating one notch to "AA minus" from "AA," citing the country's growing budget deficit and debt load.
"A sizeable fiscal shock against a backdrop of relative macroeconomic and structural weaknesses has reduced Portugal's creditworthiness," said Douglas Greenwich, associate director in Fitch's sovereign team.
Fitch said the outlook for Portugal is negative, given the country's fiscal challenges and the still struggling global economy.
The downgrade came one day before EU policy makers are due to meet in Brussels to discuss economic concerns at the Spring European Council.
Economy: Sales of new homes unexpectedly fell 2.2% to a seasonally adjusted annual rate of 308,000 units. Economists surveyed by Briefing.com had expected a jump to a 315,000 annualized unit rate from a 305,000 annualized unit rate in January.
The report came one day after an industry group said sales of existing homes fell in February, but the decline was less severe than expected.
Separately, the Commerce Department released its report on durable goods orders, showing a gain of 0.5% in February, which was the third consecutive increase and in line with economists' expectations.
Durable goods excluding autos rose 0.9%, after falling 1% in January. Economists expected an increase of 0.3%.
Company news: Shares of Starbucks (SBUX, Fortune 500) rose after the coffeehouse chain announced plans to pay an initial dividend of 10 cents per share on April 23 to investors on record when the market closes April 7.
Bank of America (BAC, Fortune 500) announced plans to begin reducing the loan balances of certain distressed homeowners with subprime or adjustable rate mortgages to make their payments more affordable. Shares of the company gained 2.6%.
General Mills reported adjusted earnings per share of 97 cents on net sales of $3.6 billion in its fiscal third quarter. Analysts surveyed by Thomson Financial had expected earnings per share of 85 cents and sales of $3.5 billion. Despite the strong results, shares of General Mills (GIS, Fortune 500) fell nearly 2%.
Lennar (LEN) gained 3.7% after the homebuilder reported a smaller-than-expected quarterly loss of 4 cents per share, versus a loss of 89 cents a year ago. The company said it sees signs the U.S. housing market is moving towards stabilization.
World markets: European stocks got a strong start but ended mixed after Portugal's credit rating was cut. Britain's FTSE 100 and France's CAC 40 were lower, while Germany's DAX was gained nearly 0.2%.
In Asia, stocks ended higher. In Japan, Tokyo's Nikkei index gained 0.4%, while the Hang Seng in Hong Kong added 0.1%
The dollar and commodities: The dollar surged against the euro, pound and yen. At one point, the U.S. currency rose to $1.35 against the euro, marking the highest level since May 2009.
Crude oil for May delivery slipped $1.30 to settle at $80.61 a barrel as the dollar soared and the government's weekly oil inventory report showed a larger than expected build in supplies.
The price of gold for April delivery fell $14.90 an ounce to $1,088.80.
Treasurys: The price of the benchmark 10-year note fell, pushing its yield up to 3.83%. Bond prices and yields move in opposite directions.
Prices fell after an auction of $42 billion worth of 5-year notes received lukewarm demand. The government is on track to sell $118 billion worth of notes this week.
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