Budget Cited in Plunge of Dollar, Stocks
Concern about inaction on the U.S. budget deficit pummeled the dollar and U.S. stocks on Monday, pushing the greenback to new postwar lows against two key foreign currencies while driving the Dow Jones industrial average to another sharp decline.
The dollar, continuing its free-fall since the stock market crash of Oct. 19, hit postwar lows against the West German mark and Japanese yen in nervous trading Monday. It also hit 5 1/2- to 7-year lows against the Swiss, French, Dutch, Italian and British currencies.
The dollar’s decline in turn helped trigger a broad stock sell-off that knocked the Dow average down 58.85 points to a close of 1,900.20. The decline equaled a loss of 3% and was the ninth-largest single-day point drop ever for the widely watched average of blue-chip stocks.
Big Board volume, however, tumbled to a mere 160.69 million shares, down from 228.29 million in last Friday’s session and the slowest since Oct. 12, one week before Black Monday. By contrast, volume on the New York Stock Exchange on Black Monday reached 604.33 million shares.
The dual declines of the dollar and stocks showed that the volatility and uneasiness gripping the financial markets since the stock crash are still far from ending.
“The (stock) market is going to be volatile, with buyers on the sidelines, until you get a little more clarity about what’s going to happen with the economy,” said Monte Gordon, director of research for Dreyfus Corp., a mutual fund company based in New York.
The declines also showed how U.S. stocks and the dollar--and U.S. economic policy-makers--are in virtually a no-win situation until new signs of progress are made on the U.S. budget and trade deficits, experts said.
Policy-makers at the Federal Reserve and the Treasury, seeking to stave off a recession and financial crisis that some fear might be triggered by the stock collapse, have pumped new money into the U.S. financial system since the crash, pushing interest rates lower. Treasury Secretary James A. Baker III said the United States will fight a recession with lower interest rates even though this may push the dollar lower.
Those lower interest rates initially helped the stock market. But they also have triggered fears that foreigners would reduce their investments in Treasury bonds and other securities that finance the U.S. budget deficit. Lower interest rates and Baker’s statement have helped the dollar to slide nearly 8% against the West German mark and more than 5% against the yen since the stock collapse.
That in turn has depressed stock prices. Experts worry that a too-low dollar will force foreigners to abandon U.S. stocks as well, since U.S. stocks are denominated in dollars.
Traders in Europe and the United States said the continued stalemate in talks between Congress and the White House on cutting the budget deficit kept the dollar depressed Monday.
The dollar received little relief from news that a two-day meeting in Switzerland of central bank officials from the United States and other Western nations ended without any new, specific initiatives to correct trade imbalances and stabilize the greenback.
The dollar ended in late New York trading at 1.6585 marks and 134.18 yen, down from 1.6705 and 135.05, respectively, late Friday.
In early trading today, the dollar continued to tumble against the yen, dropping to 133.80 yen at one point in Tokyo. On the Tokyo Stock Market, prices fell as investors absorbed news of the dollar’s plunge. After opening sharply lower, the 225-issue Nikkei Stock Average ended the morning session down 335.21 points to 22,083.16.
Many analysts expect the dollar to fall further before leveling off. But the outlook could improve, they said, if figures to be released Thursday show significant progress in reducing the size of the U.S. trade deficit for September.
The higher-than-expected $15.7-billion deficit reported for August was a major contributor to the market crash in that it showed that previous declines in the dollar had still not helped U.S. exporters as much as had been hoped.
“Both the stock market and the dollar may go down a bit more, but both could have very sharp reversals” if the trade deficit shows significant improvement, said Peter J. Canelo, chief investment strategist for the securities firm of Bear, Stearns & Co. “Almost any piece of decent good news could trigger off some surprisingly strong upward moves in stocks and the dollar.”
However, such good news was noticeably absent from Monday’s trading in stocks worldwide. Discouraged by the weaker dollar and lack of progress on the U.S. budget deficit, markets in the Far East and Europe generally declined, spreading the gloom to New York.
The U.S. market was also hurt, at least at Monday’s opening, by fear of the return of computerized program trading, the sophisticated strategy of using computers to identify and trade on discrepancies between prices of stock-index futures and the underlying stocks in the indexes.
Program trading had largely been halted in the three weeks after Black Monday, as New York Stock Exchange officials and others blamed it for contributing to that day’s 508-point collapse. But on Monday, the Big Board allowed its automated order execution systems to be used for program trading.
However, after some activity at the opening of Monday’s session, program trading was not a factor the rest of the day, accounting for very little volume, analysts said. That was because the difference between prices of stock-index futures and the underlying stocks was not great enough to make program trading profitable. But fear of the potential volatility of program trading probably kept a lot of potential stock buyers on the sidelines, cutting the volume, traders said.
Some analysts noted that Monday’s low trading volume was encouraging, coming on a day of such a large decline in the Dow.
“The quietness of the market was good news,” investment strategist Canelo said. “Most of the panic selling has been done.”
Declining issues outnumbered advances Monday by more than 3 to 1 on the NYSE, with 407 up, 1,284 down and 307 unchanged.
Other measures of stock prices also showed broad declines. The Big Board’s composite index of all its listed common stocks dropped 3.69 to close at 136.35. Standard & Poor’s 500-stock composite index was down 7.24 to 243.17.
The NASDAQ composite index for the over-the-counter market lost 5.96 to 320.43, while the American Stock Exchange market-value index closed at 249.79, down 5.44.
