European Banks Buy Dollars, but Slide Continues : In London, Stock Index Skids, Reflecting Lack of Confidence in U.S. Policy
Central banks throughout Western Europe intervened Tuesday to halt a further slide in the dollar, but prices on the London stock market, Europe’s largest, plunged 60 points amid declining confidence in the Reagan Administration’s monetary policies.
Although stock trading throughout Western Europe was unusually light because of the holidays, the inability of the London market to hold firm after Monday’s decline on Wall Street was viewed by financial analysts as an ominous sign for the new year.
Prices on the Paris and Frankfurt stock exchanges declined marginally. The Tokyo exchange was closed for the year-end holiday. In the United States, the Dow Jones industrial average closed down 16.08.
In London, the Financial Times’ index of 100 shares lost 78 points in the first five minutes of trading and gained only slightly throughout the rest of the day. It closed down 60.8 at 1,730.3.
The dollar also fell quickly at the opening of foreign exchange markets here, dropping to 1.5875 West German marks, a decline of more than a pfennig from Monday’s New York close and down four pfennigs from Thursday’s close in London.
With trading volume light and dealers reporting coordinated intervention on the part of several European central banks, the dollar quickly stabilized, eventually closing at 1.5950 marks. The dollar also closed marginally lower against the Swiss franc.
The pound, at one point up more than three cents from Monday’s close, finished the day at $1.8575, up nearly 2.5 cents.
Basic Mistrust
In New York currency trading, the negative outlook for the dollar that has gripped the market for much of this year took over again, edging the currency lower despite the earlier interventions that had halted its decline in Europe.
By the end of trading in New York on Tuesday, the dollar stood at a new low against the Japanese yen of 123.45, and it took $1.8605 to buy a British pound.
Other late dollar rates in New York, compared to late Monday’s, included: 1.5940 West German marks, down from 1.5980; 1.2885 Swiss francs, down from 1.2920; 5.4035 French francs, down from 5.4170; 1,177.50 Italian lire, down from 1,178.00, and 1.3053 Canadian dollars, down from 1.3055.
The dollar remained stable at the close of morning trading in Tokyo today, helped by moderate intervention by the Bank of Japan. The dollar ended the session at 123.53 yen, slightly lower than its 123.60-yen opening but up from Tuesday’s record low close of 123.50 yen.
Tuesday’s declines, particularly in Europe, were mainly attributed to skepticism about the strength of the Reagan Administration’s commitment to a stable dollar.
“There is a basic mistrust of the U.S. Administration,” said Michael Woods, manager of the Lloyds Bank treasury division in London, which handles foreign exchange dealings. “There is nothing to give any hope for a stable dollar.”
Christopher Tinker, an economist at the London securities house of Phillips & Drew, said: “The dollar is still seen here as a very risky currency because the Administration seems unwilling to commit itself to any value. The perception here is that the U.S. wants to have the dollar fall further.”
Tuesday’s decline came despite a statement from White House spokesman Marlin Fitzwater on Monday that the Administration wants a stable dollar. He said that any further decline would be counterproductive.
Fitzwater’s comments were brushed aside in London. Traders here said the White House statement failed to match what one analyst described as “the lukewarm activity” of the Federal Reserve to support the dollar.
London dealers said they think that the Fed took part in Tuesday’s central bank interventions, which they described as only modest in size.
Some analysts said they believe that the lack of concerted U.S. action to stabilize the dollar is part of a deliberate policy aimed at pushing West Germany toward more decisive moves to stimulate domestic economic growth. U.S. officials, they said, think that such an expansion would help ease the massive American trade deficit by providing a potentially lucrative export market for U.S. goods and also cut West Germany’s huge trade surplus. West Germany’s surplus is second only to Japan’s.
Plunge Surprised Many
“West Germany is the key to European expansion,” said Roger Bootle, a senior economic adviser at Lloyds Bank. “Without West German action, we can’t get concerted action from Europe as a whole.”
West Germany’s recently announced package of reflationary measures has been widely criticized as inadequate. It calls for $12.7 billion in new, low-interest loans to small businesses and local governments, and for advancing by a year tax cuts proposed for 1990.
“It’s an international problem that requires a coordinated solution involving both West Germany and Japan,” Bootle said. “The U.S. isn’t solely responsible.”
The severity of Tuesday’s plunge in London stock prices surprised many analysts. Buoyed by renewed takeover activity and one of the strongest economies in Europe, stock prices had risen by more than 100 points earlier this month, and some believed that this was generating enough momentum to insulate the London market, at least partially, from Wall Street’s jitters.
“The real importance of today’s drop,” economist Tinker said, “is that it shows we’re not strong enough to escape from Wall Street.
Dealers indicated that there were few institutional investors in the market and that the slide had come on a relatively light trading volume of slightly more than 300 million shares. “On a good day, we turn that kind of business by 11 a.m.,” Tinker said.
Uncertainty about the dollar has bred fears in Europe of rising U.S. interest rates, recession and the declining competitiveness of European exports in the U.S. market.
But in London, at least, the pessimism did not seem to reach much beyond the financial district. The decline in stock prices came as shoppers drawn by New Year’s sales crowded the stores along Oxford Street in record numbers in a conspicuous, contradictory display of consumer confidence.
