Dollar Is Hurting as ‘Bad Numbers’ Worry Traders
The bad news came out last Friday: a surprisingly large U.S. trade deficit for the month of June. All over the world, currency traders went home for the weekend to think about it. And by Monday morning they had made up their minds.
First in Tokyo and then elsewhere, traders sitting at tables on different continents began a frenzied selloff of hundreds of millions of dollars. By the middle of this week, the greenback had lost 5% of its value to the yen, more than 3% to the German mark and was in retreat against other currencies, as well.
“You had a very violent response to an unquestionably bad number,” explained Anne Parker Mills, a currency analyst with the Shearson Lehman Bros. investment firm in New York.
While the dollar steadied Thursday, many analysts say it has resumed a downward course that began in early 1985 and continued until this spring. “The psychology has turned 180 degrees,” said Alan Rose, manager of the Los Angeles foreign exchange office for First Interstate Bancorp. “People no longer feel comfortable holding dollars.”
What happened? Part of the answer can be found in the changing perceptions about the depth of America’s trade problems and part can be found in the sell-now-think-later approach of many currency traders to any financial news that varies from the expected.
Beginning in May, the dollar began to be helped by several forces: an upward spurt in long-term U.S. interest rates that made U.S. currency more attractive to foreign investors, the apparent commitment of national banks in the United States and Japan to prop up the dollar and growing optimism about the U.S. economy.
A key to the favorable attitudes was the fact that the nation’s trade deficit fell in March and April, evidence that U.S. goods were regaining their competitiveness--with help from the lower-valued dollar, which makes them less expensive abroad.
But a warning came in mid-July, when the Commerce Department reported that the U.S. trade gap had widened sharply in May. Yet while that caused a temporary decline in the dollar, many financial analysts played down its importance: The May figures were influenced by rising oil prices, and U.S. export volumes still seemed to be improving.
High Trade Gap
Other factors, meanwhile, continued to bolster the long-beleaguered greenback. Concern about conflict in the Persian Gulf and a possible cutoff of oil shipments there was encouraging investments in U.S. currency, which traditionally attracts foreign investments in times of crisis.
But the favorable situation was not to last.
When the U.S. merchandise trade figures for June came out last Friday--showing an unexpectedly high $15.7-billion trade gap--confidence in the dollar fell dramatically. “A big increase in the deficit was due to manufactured goods,” said Michael J. Moran, chief economist at Daiwa Securities America in New York. “And that’s an area where you expected to see a turnaround.”
The dollar closed in New York on Thursday at 144.7 yen, after having fallen as low as 144.1 yen the previous day.
Actually, the June trade figure--while disappointing--was not a complete disaster. U.S. exports continued to progress, for example, and many economists argue that the figure obscured fundamental positive trends.
Tense Atmosphere
But in the world of currency trading, where multimillion-dollar gambits are conducted in an atmosphere of near-panic, “the traders see the number come up on the screen and the reaction is, ‘Oh my God, it’s much worse than I thought.’ And they go out and sell the dollar,” observed Carlos Castellanos, a vice president with Geoffrey Bell and Co. financial consultants in New York.
It is impossible to say how quickly that recent scenario will repeat itself, but many analysts are predicting further declines for the dollar in the coming weeks. Events in the Persian Gulf are a wild card, of course, but many traders are more confident for the moment that the oil can get through. “So the safe-haven argument is not as strong an element as it was before,” Daiwa’s Moran said.
More basically, there is a growing feeling that reversing America’s trade problems is a tougher challenge than had been recognized. Americans are continuing to buy vast numbers of imports. Moreover, the imported cars, videocassette recorders and other products cost more as a result of the changing exchange rates--all of which adds to the negative side of the U.S. trade ledger.
