Profit-taking knocks U.S. stocks; Fed hurts dollar

The pullback in bank and tech shares, which have posted double-digit gains so far in January, emerged after a disappointing report on new home sales. But it did not entirely wipe out investor optimism in the wake of the Fed's extended pledge to keep U.S. interest rates low.

"All in all, it does seem like a little bit of profit-taking on the weak housing data, but we've had a good run and maybe it's simply time for a little bit of consolidation," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati. "We don't think it's a major peak, just a little bit of a break here."

The decline in Wall Street share prices was also fueled by some company results that fell short of expectations, although Caterpillar Inc, a Dow component, posted a jump in quarterly earnings that far exceeded Wall Street forecasts.

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Although stocks retreated, the Fed's latest attempt to stimulate a sluggish U.S. economy lifted oil, gold and other growth-sensitive investments, analysts said.

"In the afterglow of the Fed's decision (on Wednesday) to keep interest rates low for a longer period of time, today's generally positive U.S. data gave investors a fresh reason to move into riskier assets," said Joe Manimbo, market analyst at Travelex Global Payments in Washington.

However, fears of a possible Greek debt default limited gains for the euro and growth-oriented assets, analysts said. Nagging worries over Greece also fed bids for safe-haven U.S. and German government debt.

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Greek media reported that Greece's private creditors were willing to lower their "final offer" of a 4 percent interest rate on new Greek bonds in order to clinch a deal in time to avert an unruly default.

The Fed's extended low-rate vow and Fed Chairman Ben Bernanke's suggestion that the central bank is ready to provide more stimulus if the economy deteriorates come at a time when recent data signal a strengthening U.S. economy.

New orders for U.S. manufactured goods rose more than expected in December, while underlying trends continued to point to improving labor market conditions even as new U.S. claims for unemployment benefits rose last week.

New home sales, however, fell 2.2 percent in December. Economists had expected a modest increase.

In mid-afternoon trading, the Dow Jones industrial average .DJI was down 0.72 points, or 0.01 percent, at 12,756.24. The Standard & Poor's 500 Index .SPX was down 6.15 points, or 0.46 percent, at 1,319.90. The Nasdaq Composite Index was down 9.32 points, or 0.33 percent, at 2,808.99.

The benchmark 10-year U.S. Treasury note, buoyed by the Fed's statement, was up 20/32 in price at 100-19/32, offering a 1.93 percent yield, down 7 basis points.

The FTSEurofirst 300 .FTEU3 index of leading European shares closed up 1.2 percent after touching a six-month high, but Tokyo's Nikkei index .N225 ended 0.4 percent lower.

The MSCI world equity index jumped 0.7 percent, extending its strong start to 2012 with gains of over 6.1 percent for the year to date.

While the Fed's pledge to rock-bottom rates helped stocks, it undermined the U.S. dollar, as traders sought higher-yielding currencies.

The dollar index, which measures the greenback against a basket of other currencies, dipped 0.25 percent to 79.38 after touching near a five-week low.

The euro hit a session peak of $1.3175, its highest since December 21 , and was last trading down 0.04 percent on the day at $1.3110. It has rallied from around $1.2980 before the Fed statement on Wednesday.

In the oil market, front-month Brent crude futures moved $1.02 higher to $110.85 a barrel, reversing two straight days of losses to trade just off an intraday high of $111.89 per barrel.

U.S. crude futures came off their earlier highs, trading up 51 cents at $99.92.

Spot gold was up 0.8 percent at $1,724.25 an ounce after hitting a peak of $1,729.76, the highest since December 8.