updated 5/13/2011 5:41:45 PM ET 2011-05-13T21:41:45

Since when does the stock market take its cues from the market for silver, oil and pork bellies? When it's really the dollar that's driving the action.

The stock market rally, which began in August, relied on stronger earnings, rising commodity prices and a weak dollar, said Andrew Wilkinson, senior market analyst at Interactive Brokers. But prices for commodities have dropped by 10 percent this month, and swung wildly over the past week. Oil, for example, was nearly $114 a barrel at the end of April. On Tuesday oil settled at $104, fell, rose and fell again, to close at $99.65 on Friday.

Major Market Indices

Falling commodity prices are widely blamed for driving down stocks. The Standard & Poor's 500 index has lost 1.9 percent so far in May. Other indexes are down more than 1.5 percent for the month.

It's not simply a case of investors selling because they believe declining oil prices are a sign that the economy is losing strength. Rather, since commodities are mainly traded in dollars, it's the dollar's recent rise that is largely responsible for pushing down commodity prices. If the dollar gains strength against other currencies, it takes fewer dollars to buy the same barrel of oil.

"Suddenly, the dollar is no longer the whipping boy," Wilkinson said. "And if the dollar is no longer the whipping boy, you can no longer count on a commodity-driven rebound to push up the stock market."

Worries over Europe pushed the dollar up nearly 1 percent on Friday and erased the week's gains in the stock market.

The Dow Jones industrial average lost 100.17 points, or 0.8 percent, to close at 12,595.75. The S&P 500 fell 10.88, or 0.8 percent, to 1,337.77. The Nasdaq lost 34.57, or 1.2 percent, to 2,828.47. The slide turned the Dow and S&P lower for the week.

Financial stocks fared the worst in the past week, followed by material and energy companies. Both Bank of America Corp. and JPMorgan Chase & Co. dropped 2 percent on Friday.

Companies in the energy sector fell the most in May. Exxon Mobil Corp. lost 8 percent so far this month.

The Dow fell 0.3 percent over the week and 1.7 percent for the month. The Nasdaq was flat for the week and is down 1.6 percent for the month.

The Russell 2000, an index of small companies, ended the week up nearly 0.3 percent, but is down the most so far this month, declining 3.42 percent.

In addition to the dollar's rising value, several other forces have led to the recent rout in commodity prices. A requirement that traders back their bets on silver with more cash spurred a sell-off in metals, which some traders say cascaded into other markets. Reports over the past week showing weaker demand and rising supplies for both crude oil and gas have pushed down energy prices. U.S. oil inventories have climbed to their highest level since May 2009.

Meanwhile, betting on a weak dollar has been a popular move. For much of the last year, traders bought commodities and sold dollars.

The dollar's sudden strength has caused them to reverse those bets. "That's been the big trade," said Dan Greenhaus, chief economic strategist at Miller Tabak. "And it's getting undone."

Story: U.S. inflation hits highest level in over two years

The downside: eventually a stronger dollar makes U.S. products more expensive to foreign buyers. Exports decline. Companies that sell everything from sneakers to aircraft feel their profits pinched.

Stocks in countries that use the euro fell after the European Union warned that the debt loads of Greece, Ireland and Portugal will be larger than originally thought. Officials said that Greece needs to cut spending further, which led to concerns that the assistance the country has already received won't be enough. The Euro Stoxx 50, an index of large companies in countries that use the euro, fell 0.8 percent.

Fears of a deepening financial crisis overshadowed reports that found that consumers are feeling more confident in the U.S. economy and that inflation remains in check. Consumer prices rose 0.4 percent in April, the Labor Department said. That was in line with economist's expectations.

Most of the increases came in volatile food and energy prices. Stripping those out, prices rose 0.2 percent and stayed below the rate of inflation that the Federal Reserve considers normal.

Quotes delayed 15+ min.

"Inflation doesn't look like the risk that everyone feared," said Doug Cote, the chief market strategist at ING Investment Management.

The prices that consumers pay have risen 3.2 percent over the last 12 months, the biggest 12-month gain since October 2008. Companies like Kimberly-Clark Corp. and Colgate-Palmolive Co. that sell households products have raised prices because of higher commodity costs that have cut into their profit margins. Costs for raw materials like oil, coffee, and cattle have risen more than 10 percent this year.

More than two stocks fell for every one that rose on the New York Stock Exchange. Trading volume was 3.5 billion shares.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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