Dollar’s Continued Slide Helps Drag Stocks Down : Fed Move to Prop Up Currency Indicates U.S. Concern About Decline
The United States, anxious about the latest slide in the value of the dollar, intervened in foreign exchange markets Friday to prop up the U.S. currency--the first time since early January that it has done so.
Government officials declined as usual to comment on the move, but currency traders said the action was carried out in an unusually visible way, intended to send a signal that Washington is concerned about the dollar’s slide.
“You got the feeling that you couldn’t make a move on the dollar without the Fed (the Federal Reserve Board, which conducts intervention operations for the Treasury) coming in behind,” one trader said. Analysts said the Bank of Japan also intervened to brake the rise of the yen.
The re-entry of the United States into the currency markets was taken as a signal that Washington is getting worried that the slide might continue too far.
Reagan Administration officials believe that a further decline in the value of the dollar would hurt American allies by crimping their exports too sharply. They also fear that renewed volatility in the markets would discourage business from needed investment to expand production capacity.
The dollar’s slump in recent days has been contributing to a slump in stock prices. On Friday, partly in reaction to the continued slide of the dollar, the Dow Jones industrial index fell 44.92 points to 1,978.95.
Finance ministers from the United States and other major industrial nations agreed last December on new limits and procedures to stabilize their currency values. Until recently, however, the dollar was relatively stable and no intervention was necessary.
Friday’s intervention appeared to be at least partly successful. In New York, the dollar dipped sharply Friday morning but then leveled off after the intervention by the Fed. It dipped again in mid-afternoon before trailing off in light trading. Still, the U.S. currency closed at 125.20 yen, another record low.
Analysts have attributed the dollar’s latest slide to a variety of factors. First, the Japanese fiscal year is drawing to a close and accounting rules there require insurance companies to report a 15% loss on their unlisted dollar-denominated securities if the dollar falls below 126.80 yen. Many traders fear that Japanese insurers will try to offset these losses by selling dollar-denominated stocks and bonds.
Second, traders are nervous about a provision Congress is considering as part of the pending omnibus trade bill that would require advance disclosure by foreigners of investments they make in the United States. Opponents fear that such requirements would discourage foreign capital.
Investors have been worried about an apparent widening of the trade deficit in Britain, which reported Friday that its trade gap was larger than the markets had expected.
However, analysts said the figures may have been distorted by the introduction of new standard customs forms within the European Community. The British trade deficit figures have been unusually large both for January and February.
Traders were reluctant to speculate about how the dollar would fare Monday, when trading reopens in U.S. currency markets. “Most factors are going pretty well for the dollar, but the market still is bearish,” one trader said. “We expect it to stay that way for at least a few more days.”
In Tokyo, where the business day ends as Europe’s begins, the dollar fell 0.56 yen to a closing 125.74 yen. Later, in London, it was quoted at 125.33 yen. In New York, the dollar closed at 125.30 yen, down from 125.575 yen Thursday.
In London, the pound fell to $1.8360 from $1.8435 late Thursday. In New York, it cost $1.84175 to buy one pound, cheaper than Thursday’s $1.8420.
Other late dollar rates in New York, compared to late Thursday, included: 1.6760 West German marks, down from 1.67725; 1.3865 Swiss francs, up from 1.38625; 5.68625 French francs, down from 5.6995; 1,238.50 Italian lire, down from 1,242.50, and 1.24205 Canadian dollars, down from 1.2421.
