Stock Prices Dive to Lowest Point in 7 Months, Caught in Grasp of Falling Dollar : Worry Over Bush’s Ability to Cut Deficit Blamed for Currency’s 10-Month Low
The world’s foreign exchange markets Friday told President-elect George Bush to read their lips: They want the incoming Administration to begin moving quickly--and effectively--to reduce the federal budget deficit or risk seeing the U.S. currency weaken further.
Worries that the new Administration will not be able to slash the deficit early next year sent the dollar plunging to a 10-month low Friday, following a slump earlier this week and several days of seesawing.
The U.S. currency ended the day in New York at 122.70 Japanese yen and 1.7355 West German marks after falling earlier in both Tokyo and Frankfurt. The closing rates in New York on Thursday had been 124.03 yen and 1.7531 marks, respectively. Trading was thin in virtually all of the world’s major foreign exchange markets because of the Veterans Day holiday.
Richard E. Witten, vice president for currency trading at Goldman Sachs & Co., the large investment banking firm, said the decline reflected “continued concern in the financial markets that there won’t be any constructive action on the budget deficit.”
Needs Strong Statement
Both the Bank of Japan and the West German Bundesbank intervened modestly in an effort to slow the slide, but it was not immediately clear whether the U.S. Federal Reserve joined in, and the markets appeared to be unimpressed.
Gary Taratunio, a trader at Manufacturers Hanover Trust Co., told the Associated Press late Friday that dealers had noted that the intervention by central banks so far simply “was not enough.”
“The whole market is waiting to test the resolve of the central banks,” he said, “and given that, unless there is strong intervention or policy statements by the new Bush Cabinet, the dollar will continue to slide.”
The continuing bearishness on the dollar was being interpreted as a sign that the markets were becoming anxious about the outlook for reducing the U.S. budget deficit, which many consider to be a key element in improving the trade balance.
Traders appeared particularly uneasy that Congress and the new Administration might become deadlocked because of Bush’s refusal to agree to a general tax increase. The President-elect appeared to be trying to give himself some “wiggle room” on the tax-increase issue in remarks on Wednesday, but investors still appeared leery.
Analysts said traders also are worried because the West German and Japanese trade surpluses--the mirror images of the U.S. trade deficits--are back on the rise again after declining earlier this year. Japan announced Wednesday that its trade surplus rose sharply in October for the second month in a row.
The decline in the dollar’s value has begun to worry some policy-makers. The dollar now is at the bottom of the range set by finance ministers of the Group of Seven--the United States, West Germany, Japan, Britain, France, Italy and Canada--as tolerable from an economic standpoint.
Inflation Worries
Nevertheless, there was no immediate sign that the ministers were preparing to take emergency action on the dollar, such as calling a meeting of the Group of Seven or embarking on any massive intervention in the markets.
One U.S. official suggested that the seven governments may step up their intervention if the decline continues Monday. Treasury Secretary Nicholas F. Brady, who is expected to continue in the Bush Administration, has been silent on the issue.
U.S. officials are reluctant to let the dollar slide much further for fear that it might rekindle inflationary pressures. Treasury Undersecretary George Gould told an audience Friday in London that “we, as a matter of policy, have no interest in seeing the dollar lower.”
Meanwhile, gold prices rose around the world, complementing the dollar’s decline. Gold in New York rose Friday to $421.25 an ounce from $418.20 on Thursday.
