Record Trade Deficit Sends Dollar to Lows Against Yen, Mark in Frantic Trading
The U.S. dollar plummeted to historic lows against the Japanese yen and West German mark Thursday following news that America’s trade deficit had soared to a record-breaking $17.63 billion for October, $2 billion worse than analysts had expected.
Currency traders in Tokyo, who had waited past 10:30 p.m. for the trade report, which was released at 8:30 a.m. in Washington, set a pattern of frantic dollar dumping that continued throughout the world. “The herd instinct is for a lower dollar,” said Samuel D. Kahan, chief economist at Kleinwort Benson Government Securities Inc. in Chicago.
In New York markets, the dollar was trading for as little as 128.95 yen, its weakest level since the Japanese currency was realigned after World War II. The greenback had also hurtled to a historic low of 1.631 against the mark, its nadir since the modern West German currency was created in 1948. And after New York offices closed, the dollar continued downhill, opening this morning at 128.75 yen on Tokyo’s foreign exchange market.
Financial analysts were unanimous in the view that the widening trade deficit caused the selloff. “It was horrendous--the worst figure we ever had,” said Brian Cronin, a vice president in Security Pacific National Bank’s global trading department in Los Angeles.
Bewildered Traders
Concerned about the financial tempest under way, national banks from a variety of countries bought dollars in an attempt to prop up the beleaguered U.S. currency Thursday. Those reportedly in the market included the U.S. Federal Reserve and central banks from West Germany, England, Canada, Italy and Switzerland.
At first, these efforts slowed the dollar’s plunge. However, the currency regained its downward momentum later in the day, bewildering traders who have never seen it at such depths. “It’s very difficult when you’re trading in uncharted territory,” Security Pacific’s Cronin said. “The dollar-yen has never been this low before.”
In the days after the stock market crash, many investors worried that the financial turbulence would lead to a similar collapse of the dollar’s value. Recently, however, economists had been gaining confidence that such a scenario could be avoided.
Encouraging signs included evidence of continued vitality in the U.S. economy, lower interest rates in Europe and hints that the major industrial powers were renewing efforts to stabilize the dollar. But Robert A. White, a vice president at First Interstate Bank, said Thursday’s plunge reawakened insecurities: “A lot of small signals that had pointed to calm through the end of the year were tossed out the window by this number.”
Marginal Success
Yet if analysts agreed on the cause of the dollar’s troubles, they were far less certain where they would lead. Since early 1985, U.S. policy makers have counted on a lower-valued dollar to ease the U.S. trade deficit, a global financial imbalance that also helped trigger the Oct. 19 stock market crash.
But the policy has met with marginal success thus far. U.S. manufacturers have gained business throughout the world, and exports have risen relative to imports. But these gains have been offset by the fact that American consumers continue to buy vast amounts of imports--and at higher prices. Said Mills: “Exports have to grow a lot faster than imports just to keep the trade deficit steady.”
Moreover, the policy has come with a price. Speculators--who have bid the dollar down largely because of the trade and budget deficits--note that the economies of Japan and other export-oriented countries will suffer if the dollar falls further. This adds to the economic jitters.
Higher interest rates seemed improbable immediately after the stock market crash because officials were concerned that higher rates could spark a recession.
But the October trade deficit suggests that higher rates could be in the offing as a way to cool down import purchases and ease the deficit.
