Financial Fears Ease as Bush Supports Dollar
Financial markets around the globe appeared to stabilize somewhat Monday in the wake of assurances by President-elect George Bush that he does not want the dollar to fall further, but analysts cautioned that the risk of another market plunge may not be over.
Bush, on vacation in Gulf Stream, Fla., told reporters that “the (dollar) policy of the existing Administration . . . will be the policy of the George Bush Administration”--including a continuation of the U.S.-led international effort to keep the greenback near its current level.
“These gyrations happen,” the President-elect said of the last few days’ plunge in the dollar’s value, which had sent the stock market plummeting Friday and raised fears that another big financial market slump was in the making.
Bush also sought to reassure the markets that he regards the budget deficit as “a matter of grave urgency.” He pledged to “address myself to (it) early on in my presidency,” and said that he will be talking about it “perhaps before then” to key congressional leaders.
Meanwhile, Bush transition officials made preparations for an expected announcement, possibly as early as today, that current Treasury Secretary Nicholas F. Brady, an old friend of Bush’s, would continue in his post during the new Administration. Such an announcement is expected to help further calm the financial markets.
Brady, 58, was appointed last autumn to succeed James A. Baker III, who ran the Bush campaign before the election and since has been named Bush’s new secretary of state. It was widely assumed at the time that Brady would stay on if Bush won the presidency.
Will Work on Plan
Brady and Richard G. Darman, a former Reagan Administration Treasury official whom Bush is expected to name director of the Office of Management and Budget for the new Administration, are expected to begin work soon on a possible budget deficit-reduction plan.
The dollar fell again in early trading in Tokyo on Monday, but it recovered in European markets later after the Bank of Japan intervened persistently to support the U.S. currency--a step that traders had been looking for as a sign that the United States and its economic allies were serious about wanting to keep the dollar stable.
The U.S. currency closed in New York on Monday at 123.75 Japanese yen and 1.7465 West German marks after falling initially to 122.5 yen in Tokyo. On Friday, the dollar plunged to 122.7 yen and 1.7355 marks, dipping to a 10-year low.
Market Recovers
In the United States, the stock market recovered a bit on Monday. The Dow Jones average of 30 industrial stocks edged down only 1.95 points after plunging 47 points on Friday--still about 60 points below its level before the Nov. 8 election but apparently no longer in a sharp decline.
Bond prices dropped sharply, reflecting delayed nervousness over the dollar’s early decline, but rebounded by the end of the day.
Ellen Evans, a financial markets analyst for Salomon Bros., the New York investment house, said that the currency markets had been “testing the resolve” of the world’s major central banks to see if they intended to continue stabilizing the dollar in the wake of the U.S. election. She said that “we’re likely to see a further testing” in future weeks.
Bond traders were fearful that a continued decline in the dollar would scare away foreign investors and force the Federal Reserve Board to raise interest rates. Washington needs foreign capital to help finance the U.S. budget deficit.
Despite Monday’s apparent respite in the currency markets, analysts said that the dollar could begin another substantial slide Wednesday if the U.S. merchandise trade figures scheduled to be published that day show the trade deficit worsening.
David Hale, economist for Kemper Financial Services in Chicago, predicted that the markets “are going to be shaky for several more weeks” until the new Administration makes its intentions clear. “People just aren’t sure where things are going,” he said.
The plunge in the dollar’s value Friday had caused some concern among policy-makers here. Both Reagan and Bush economic advisers are fearful that a significant decline in the dollar might rekindle inflation and send interest rates soaring, eventually bringing on a slump. It was clear that top government policy-makers had not expected the plunge.
Brady issued a statement Monday saying that the Administration “is committed to exchange market stability,” saying that the “key to that stability is the economic policy coordination process, including cooperation in exchange markets.”
And in Japan, the central bank governor, Satoshi Sumita, warned that the Bank of Japan will intervene heavily to keep currency values stable. Japan’s intervention in the currency markets Monday appeared to convince traders that officials were serious about wanting stability.
The weeklong slide in the dollar’s value had sent senior Bush advisers rushing to reassure the financial markets that the incoming Administration is serious about reducing the budget and trade deficits.
On Sunday, Craig Fuller, the vice president’s chief of staff, said on a television interview program that Bush will be “ready on day one (of his Administration) to sit down with the Congress and negotiate a package. . . . We are very serious and determined,” he said.
One source of nervousness for the markets has been Bush’s repeated pledge not to raise taxes--a move that traders fear will make it impossible for him to reach a budget compromise with Congress. At a press conference Wednesday, the President-elect seemed to be trying to leave himself some “wiggle-room” on the issue, but the markets so far apparently remain unconvinced.
Traders also are worried because the West German and Japanese trade surpluses--mirror images of the U.S. trade deficits--are back on the rise again after declining earlier this year. Japan’s trade surplus was up sharply in October for the second month in a row.
The speculation also was fueled when Martin S. Feldstein, a sometime Bush economic adviser, said last Wednesday that the dollar would have to drop by at least 20% in the next three years if the United States is to eliminate its trade deficit.
U.S. officials’ pleas for stability in the currency markets were backed up by other Western leaders. In New York, Friedhelm Ost, a spokesman for visiting West German Chancellor Helmut Kohl, said that Bonn is not interested in seeing the dollar go down. “We are interested in a stable exchange rate so there should be no strong or heavy fluctuations,” Ost said.
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 optimal from an economic point of view.
Staff writer Cathleen Decker contributed to this story from Gulf Stream, Fla.
