Dollar Falls in Expectation of Interest Cuts
The dollar plunged against world currencies Thursday, touching a new low against the German mark on investors’ expectations that a federal budget pact would drive interest rates lower.
The greenback hit a low of 1.5300 marks in morning New York trading before a modest updraft carried it to a closing 1.5330 marks. The currency had closed Wednesday at 1.5425 marks.
Currency traders believe adoption of the $500-billion deficit-cutting agreement reached by the White House and congressional leaders will send an immediate signal to the Federal Reserve Board that it can ease interest rates without risking a rise in inflation. As rates fall, world investors will be less attracted to dollar-denominated investments.
Traders observed also that the dollar would probably weaken further if the budget plan falls apart. Such a development would weaken world confidence in the U.S. economy and drive investors to other currencies, many said.
If failure of the plan forced the Draconian budget cuts mandated by the Gramm-Rudman Act, it would also probably bring lower rates and a weaker dollar, they noted.
“It’s a no-win situation for the dollar,” said David Gilmore, senior currency analyst with the investment research firm of McCarthy Crisanti Maffei in New York. “Either way, we’re heading down.”
The dollar was also weak against the Japanese yen Thursday, touching a 17-month low. It ended at 133.70 yen in New York trading, compared to 136.05 on Wednesday.
The dollar has been declining sharply since the onset of the Persian Gulf crisis drove oil prices up and dramatically increased the chances of a recession. It has lost 16% of its value against the yen since its recent peak in July and 10% against the mark since peaking against that currency in August.
Investors have worried not only about the prospect of a cyclical recession but also about the threats to the federal budget posed by the savings and loan cleanup, shaky real estate markets and the growing evidence of weakness in major money-center banks.
Many economists still believe that the dollar’s descent is beneficial overall for the economy, because it reduces the price of American goods to overseas customers and thus helps stimulate the U.S. manufacturing sector.
U.S. exports remain one of the stronger parts of a languishing economy.
“We probably haven’t yet reached the point where the decline is bad for us,” said Ken Ackbarali, economist with First Interstate Bank in Los Angeles.
But the weaker dollar does increase what U.S. consumers pay for foreign goods--including the 50% of U.S. oil needs that are filled by imports, Ackbarali noted.
Federal Reserve Chairman Alan Greenspan seemed to confirm traders’ expectations when he told Congress in testimony Wednesday that approval of the budget package would “certainly” lead to lower interest rates. “He was about as explicit as the Fed can ever be about predicting lower rates,” one New York currency trader said.
Traders cited a series of other reasons for bearishness on the dollar.
Recent reports on the economic condition of the United States have generally pointed to weakening and recession. A government report due today on employment is likely to do the same, McCarthy Crisanti’s Gilmore said.
“We don’t expect to see much employment strength in manufacturing or construction, and that should support the theory that we’re headed to a recession in the fourth quarter” of the year, Gilmore said.
He said the market was swept at one point Thursday by rumors that Fed officials were checking bank short-term loan prices, an action that sometimes signals a move to ease credit. The rumor helped push the dollar down several ticks, but it proved to be unfounded, Gilmore said.
The analyst suggested that the dollar might fall to 1.50 marks before year-end. At that point, he said, the Fed might try to reverse its course by buying up the currency.
One trader said that the most damaging sign for investors in dollar-denominated securities is the growing evidence that U.S. leaders are simply unable politically to reach a budget-cutting accord.
