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Dec. 8, 2010, 1:48 p.m. EST

Strong Dollar Caps Stock Gains, Sends Commodities Lower

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By Andrea Tryphonides

Strong economic data in Europe helped boost equities off their lows Wednesday, but the continuing rise of the dollar in the wake of a likely extension of U.S. tax cuts capped any significant gains for the main indexes and stopped the recent surge in commodity prices.

The Stoxx Europe 600 index ended up 0.4% at 274.98, its highest close since Sept. 19, 2008. The passing of the Irish austerity budget late Tuesday helped sentiment somewhat, but the session was choppy overall. The U.K. and German indexes each snapped a two-day winning streak, with the FTSE 100 closing down 0.2% at 5794.53 and the DAX slipping 0.4% to 6975.87 but France's CAC-40 closed 0.6% higher at 3831.98.

The Dow Jones Industrial Average was flat at 11358.3 by the close of European equity markets. Japan's Nikkei Average closed up 0.9% as the weaker yen helped boost export stocks but in Shanghai and Hong Kong, shares fell 1% and 1.4%, respectively.

Markets on the periphery of the euro zone had a slow start but turned solidly higher as investors breathed a collective sigh of relief after Ireland's €6 billion austerity budget ($7.96 billion) cleared its first hurdle in parliament. There will be several more budget votes in Ireland in coming days as the government seeks to reduce the nation's soaring deficit.

In Dublin, the ISEQ index rose 0.6% to 2817.89. Spain's IBEX 35 climbed 1.6% to 10078.40, and Italy's FTSE MIB gained 1.4% to close at 20393.95.

The dollar continued to strengthen against other major currencies after the White House's agreement with Congressional Republicans on tax-break extensions along with a bevy of additional tax cuts.

"Expect…lots of talk about Wall Street economists upgrading their GDP forecasts in coming days, with a 3% plus GDP growth rate for 2011 beginning to be talked about as a reasonable proposition," said Ian Harwood , chief economist at Evolution Securities.

The strength of the greenback put pressure on the price of base and precious metals. This, along with speculation that China could be ready to hike rates as early as this weekend, weighed on resource-related stocks, with the Stoxx Europe 600 basic-resources index down 1.4% at 611.19.

However, the main indexes managed to pare early losses after some decent economic data. German industrial production surged in October from the previous month, led by a strong performance in manufacturing.

A survey by the Confederation of British Industry revealed U.K. industrial output is expected to pick up in the three months from December, with export orders in December hitting their strongest level for more than 15 years.

The survey damped any expectations that the Bank of England will expand its monetary-easing program at its monthly Monetary Policy Committee meeting on Thursday.

In early afternoon trade in New York, the euro was at $1.3260, down from $1.3274 late Tuesday, while the British pound rose to $1.5806 after the better-than-expected CBI trends data, from $1.5769.

By the close of European equity markets, most actively traded gold for February delivery on the Comex division of the New York Mercantile Exchange fell $27.30 a troy ounce, or 1.9%, to $1,381.70, dragged lower after bond yields soared.

Light, sweet crude for January delivery also fell, and was down 62 cents, or 0.7%, at $88.07 a barrel on the New York Mercantile Exchange. The oil price declined after U.S. crude inventories posted a bigger-than-expected draw last week, according to figures from the U.S. Department of Energy.

In major market action:

UniCredit /zigman2/quotes/200769686/delayed IT:UCG +0.42% , which has wide exposure to riskier euro-zone markets, rose 2.4% in Milan and Banco Popolare surged 9.2%. In Paris, Société Générale /zigman2/quotes/206663756/delayed FR:GLE +1.46% advanced 3% and BNP Paribas /zigman2/quotes/206351084/delayed FR:BNP +0.08% gained 2.7%.

Insurers also rallied. AXA /zigman2/quotes/202169431/delayed FR:CS +0.53% climbed 3.1% in Paris and Allianz /zigman2/quotes/205544832/delayed DE:ALV +0.29% rose 2.2% in Frankfurt.

Volvo /zigman2/quotes/208939564/delayed SE:VOLV.B -1.64% fell 1% in Stockholm after the truck and auto maker said Chief Executive Leif Johansson would step down next summer after nearly 14 years at the helm.

In Frankfurt, the auto sector succumbed to profit-taking, with Volkswagen down 5.6% and Porsche /zigman2/quotes/209812019/delayed DE:PAH3 -0.30% down 5.7%. Porsche's loss ended a six-day, 22% surge, part of a near-doubling of the stock price in two months.

European defense and aerospace giant EADS rose 3.1% in Paris after Chief Financial Officer Hans Peter Ring told the Börsen Zeitung that he expects profit to improve significantly in 2012.

U.K. security-services firm G4S /zigman2/quotes/202248409/delayed UK:GFS +0.45% advanced 4.8% after Reuters reported private-equity firm Apax is in talks to buy one of its rivals, Danish cleaning company ISS, for $8.5 billion.

Also in the U.K., shopping-mall owner Capital Shopping Centres Group slumped 5.3% after U.S. shareholder Simon Property Group /zigman2/quotes/209746667/composite SPG -5.17% renewed efforts to block its planned acquisition of the Trafford shopping center in Manchester, England. Simon Property also asked CSC to open its books for a "specific due diligence" that could lead to a bid but warned it wouldn't proceed if CSC refuses to give it information.

Aude Lagorce contributed to this article.

Write to Andrea Tryphonides at andrea.tryphonides@dowjones.com

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