By Ellie Ismailidou and Wallace Witkowski, MarketWatch

Dollar briefly drops below Yen100; Fed's Dudley hints at Sept. hike

U.S. stocks closed at session lows Tuesday, a day after notching record highs, as investors weighed hawkish comments by Federal Reserve officials against sharp gains for oil futures, a weakening dollar and fresh consumer-price data that showed U.S. inflation remains tepid.

The S&P 500 index fell 12 points, or 0.6%, to close at 2,178.15, as nine out of 10 sectors traded lower, led by a 2% drop in telecom stocks and a 1.2% loss in utility shares. Telecom and utilities are two income-paying stock sectors traditionally viewed as bond alternatives--which take a hit when interest-rate expectations rise.

Energy was the only S&P 500 sector to close in positive territory, up 0.2%, boosted by strong gains in crude-oil futures (http://www.marketwatch.com/story/oil-stumbles-as-investors-cash-in-on-gains-but-sentiment-still-upbeat-2016-08-16).

The Dow Jones Industrial Average closed down 84.03 points, or 0.5%, at 18,552.02, pressured by a 1.6% declines in both Johnson & Johnson Inc. (JNJ) and Verizon Communications Inc. (VZ)

Apple Inc.(AAPL) slipped 0.1% lower after regulatory filings showed Warren Buffett's Berkshire Hathaway Inc. (BRKA) (BRKA) loaded up on shares. Others, such as George Soros's hedge fund Soros Asset Management and David Einhorn's Greenlight Capital, reduced their stakes in the iPhone maker.

Read: Why Warren Buffett is grabbing Apple stock while other big names run away (http://www.marketwatch.com/story/why-warren-buffett-is-grabbing-apple-stock-while-other-big-names-run-away-2016-08-15)

(http://www.marketwatch.com/story/why-warren-buffett-is-grabbing-apple-stock-while-other-big-names-run-away-2016-08-15)Also read: Now, activist investors are flying below the radar (http://www.marketwatch.com/story/now-activist-investors-are-flying-below-the-radar-2016-08-16)

Among individual companies, Home Depot Inc.(HD) shares slid 0.4% after the do-it-yourself retailer reported same-store sales rose 5.4% in the second quarter.

The Nasdaq Composite Index finished down 34.90 points, or 0.7%, at 5,227.11, after setting record closing levels for three sessions in a row.

The S&P 500, Dow industrials, and Nasdaq Composite all set all-time closing highs (http://www.marketwatch.com/story/us-stock-futures-inch-higher-ahead-of-empire-state-reading-2016-08-15) Monday, marking the second time in three sessions that all three indexes notched records on the same day. Until last Thursday, however, the benchmarks hadn't scored simultaneous record closes since 1999.

William Dudley, president of the New York Federal Reserve Bank (http://www.marketwatch.com/story/feds-dudley-says-september-rate-hike-is-possible-2016-08-16), on Tuesday said the time for another interest-rate increase is approaching and a rate increase as soon as September is a possibility, adding to the selling pressures on U.S. equities.

Read: High hopes for revenue are lifting stocks--for now (http://www.marketwatch.com/story/high-hopes-for-revenue-are-lifting-stocksfor-now-2016-08-16)

Stock investors were focusing Tuesday on the yen's strength (http://www.marketwatch.com/story/yen-soars-to-one-month-high-against-dollar-2016-08-16), which broke below the Yen100-mark against the dollar early in the morning, a level not seen since shortly after the U.K.'s vote to leave the European Union, but later retreated somewhat. The dollar, as gauged by the U.S. ICE Dollar Index was down 0.9% at 94.78.

Opinion:Here's the safest place for your money with stocks at record highs (http://www.marketwatch.com/story/heres-the-safest-place-for-your-money-with-stocks-at-record-highs-2016-08-15)

(http://www.marketwatch.com/story/heres-the-safest-place-for-your-money-with-stocks-at-record-highs-2016-08-15)Given the yen's status as the haven currency for global investors, "there is a sense that when the yen is stronger, it represents broader risk aversion in global markets," said Quincy Krosby, market strategist at Prudential Financial.

See:Here's an interesting theory about why the dollar is dropping (http://www.marketwatch.com/story/heres-an-interesting-theory-about-why-the-dollar-is-dropping-2016-08-16)

Still, Krosby argued that low liquidity in the summer months along with expectations of dovish central banks in the European Union and in the U.K. were contributing to the yen's strength--rather than a feeling of panic or extreme risk aversion in the market. That also explained why U.S. stocks were still hovering near their all-time highs, despite a slight pullback.

"When stocks reach new highs and volumes are at August's [low] levels, you will see some consolidation and some digesting begin," she said.

Also weighing on stocks was a report showing the U. S.consumer-price index was unchanged in July (http://www.marketwatch.com/story/consumer-price-index-unchanged-in-july-2016-08-16), adding to the risk-off sentiment that started in Asia, where the Nikkei 225 index dropped 1.6%, and in Europe, where stocks also struggled.

But housing starts rose to their second-highest rate (http://www.marketwatch.com/story/housing-starts-rise-to-second-highest-rate-since-recession-on-multifamily-rebound-2016-08-16)since the recession on multifamily-home rebound, the Commerce Department said Tuesday. And industrial production in July (http://www.marketwatch.com/story/us-industrial-output-jumps-in-july-2016-08-16) saw the biggest one-month gain in 20 months, suggesting that the factory sector could be on the mend.

Overnight, San Francisco Fed President John Williams said the central bank should consider aiming for higher inflation (http://www.marketwatch.com/story/feds-williams-says-inflation-target-should-be-increased-2016-08-15) than the current 2% target. The current target "is not well suited" for the new low-interest-rate era because "there is simply not enough room for central banks to cut interest rates in response to an economic downturn," Williams said.

Putting Dudley's and Williams's comments in context, it seems like "Fed officials are trying to tell the market that [a rate hike in] September might be on the table, but the market doesn't believe that," said Nick Burwell, a portfolio manager at Cabot Wealth Management.

Meanwhile, the flurry of data on Tuesday showed, according to Burwell, that "this recovery is led by jobs and housing," while inflation is lagging--a combination that falls short of the Fed's requirements for a rate hike and supports risk assets in the short term.

More Fed speakers: A fairly busy speaking week for Federal Reserve officials kicked off with Atlanta Fed President Dennis Lockhart, who said the outlook on the U.S. economy makes him open to "at least one" (http://www.marketwatch.com/story/feds-lockhart-open-to-at-least-one-rate-hike-this-year-2016-08-16) rate hike this year. The minutes of the Fed's July 27 meeting are due Wednesday.

Stocks to watch: Dick's Sporting Goods Inc.(DKS) shares jumped 7.1% after the retailer beat second-quarter earnings estimates (http://www.marketwatch.com/story/dicks-sporting-goods-shares-rise-after-earnings-beat-guidance-raised-2016-08-16)and raised its full-year outlook.

TJX Cos.(TJX) shares tumbled 5.8% despite the fact that its earnings beat estimates, as its outlook for the current quarter (http://www.marketwatch.com/story/tjx-third-quarter-outlook-disappoints-stock-falls-2016-08-16)landed below expectations.

The weeks's earnings docket includes other retailers such as Target Corp.(TGT). Here's what to watch for in Target's earnings (http://www.marketwatch.com/story/what-to-watch-for-in-target-earnings-2016-08-15).

BHP Billiton Ltd.(BHP.AU) (BLT.LN) (BHP.AU) was up 1% even as the Anglo-Australian mining giant swung to its worst-ever loss of $6.39 billion (http://www.marketwatch.com/story/bhp-billiton-posts-64-bln-loss-cuts-dividend-2016-08-16) and cut its final dividend by 77%, grappling with a slump in commodity prices.

Among other quarterly changes, hedge-fund manager John Paulson shed big positions (http://www.marketwatch.com/story/john-paulson-adds-facebook-office-depot-sheds-t-mobile-allergan-2016-08-15) in T-Mobile US Inc.(TMUS) and Activision Blizzard Inc.(ATVI). But he created a new position in Facebook Inc.(FB) and doubled his stake in Office Depot Inc.(ODP)

Other markets: As the dollar pulled lower, gold rose to its highest level in two weeks (http://www.marketwatch.com/story/gold-tries-for-best-back-to-back-advance-in-2-weeks-2016-08-16), settling up 0.7% at $1,356.90 an ounce.

Data showed inflation in the U.K. rose a forecast-beating 0.6% in July (http://www.marketwatch.com/story/weak-pound-after-brexit-lifts-uk-inflation-to-highest-since-2014-2016-08-16), on fallout from the Brexit vote, which made imported goods pricier in that country. Sterling rose to $1.3043 after the inflation release, up from $1.2880 late Monday in New York.

--Barbara Kollmeyer in Madrid contributed to this article.

(END) Dow Jones Newswires

August 16, 2016 16:21 ET (20:21 GMT)

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