Dollar’s Fall--and Its Fallout : Greenback’s Weakness Knocks Dow Down 25.93 : Markets: The fact that trading volume in most exchanges was relatively modest is being interpreted as a hopeful sign.
The dollar continued its steep descent Monday, pushing interest rates higher and dealing another blow to key world stock markets.
But analysts noted that trading in most financial markets was relatively modest, a sign that the malaise that has suddenly overtaken Wall Street stems more from a dearth of interest than a rush to sell.
The Dow Jones industrial average, which fell 50.79 points on Friday as the dollar’s losses began to snowball, sank 25.93 points to 3,228.17 on Monday, its lowest close since April 9.
But just 165.69 million shares changed hands on the New York Stock Exchange, typically slow for a summer Monday.
“The market had plenty of time to panic, but we never saw any of that,” said Len Hefter, head of over-the-counter stock trading at Jefferies & Co. in Dallas. “There’s just a total lack of interest on the buy side,” he said.
However, some Wall Street strategists warned that investors may be wrong to ignore the dollar’s slump, noting that the October, 1987, stock market crash was partly a result of a global crisis of confidence in the dollar.
“I don’t understand why people aren’t more concerned,” said William Dodge, strategist at brokerage Dean Witter Reynolds in New York. He advised clients to cut the weighting of stocks in their portfolios to 50%, down from 55% previously.
Monday’s market turmoil was largely a replay of Friday’s action, when the dollar plummeted on foreign disappointment over President Bush’s acceptance speech to the Republican National Convention on Thursday night. Currency traders said foreigners are losing faith that America can cut its massive federal budget deficit and put the economy back on track.
How markets settled Monday:
* The dollar closed in New York at a new post-World War II low of 1.403 German marks, down 2.6 pfennigs from Friday’s 1.429 marks. The U.S. currency fell despite repeated dollar buying by the Federal Reserve and foreign central banks.
Traders said the dollar sank as foreign investors continued to bail out of U.S. Treasury bills and bonds in favor of German bonds, which pay higher interest.
Given the apparent free-fall in the dollar--and foreigners’ growing lack of confidence in the U.S. economic outlook--many economists suggest that the U.S. currency may not bottom before reaching 1.30 to 1.35 marks.
“It’s like a child crying itself to sleep at this point--you just have to let it go,” said Mike Casey, international economist at Ramirez Capital Consultants in New York.
In morning trading today in Asia, the dollar fell further, to 1.399 marks.
* As foreign selling of U.S. bonds accelerated, buyers in the Treasury market demanded higher yields to take bonds off foreigners’ hands. The discount rate on three-month Treasury bills rose to 3.14% from 3.06% Friday.
Longer-term yields also rose, with the yield on 30-year Treasury bonds closing at 7.44% versus 7.35% Friday.
Bonds were also hurt by worries that the Federal Reserve may have to defend the dollar at some point by actively pushing up U.S. interest rates--to narrow the spread between U.S. and foreign rates.
But many economists sought to dispel that fear, saying the weak U.S. economy--and the upcoming presidential election--virtually guaranteed that the Fed would refrain from raising rates.
“I think that’s a relatively remote possibility,” said Stephen Roach, economist at Morgan Stanley & Co. in New York.
The biggest problem for the bond market in the short-term is simply that some investors will decide to take profits after the big bond rally of recent months, economists said.
* Global stock markets reacted to the collapsing dollar and higher U.S. interest rates with a broad decline. Many investors are worried that the weak dollar is a harbinger of another recession in the United States, which could in turn drag down foreign economies.
London’s stock market was among the hardest hit overseas. The Financial Times 100-share index plummeted 54.60 points, or 2.3%, to 2,311.10, the biggest one-day fall this year.
In Frankfurt, the DAX-30 index lost 21.28 points to 1,498.74.
Many smaller markets also suffered sharp declines. Mexico City’s Bolsa index plunged 57.88 points, or 4.1%, to 1,366.78.
And in Hong Kong, the Hang Seng index slumped 118.46 points, or 2.2%, to 5,390.93.
Only Tokyo managed to avoid being mauled. The Nikkei index continued its rebound from 6 1/2-year lows, rising 411.08 points, or 2.5%, to 16,627.96.
At midday today the Nikkei pushed even higher, adding 78.28 points to 16,706.24.
In the United States, while Monday’s Dow loss was only half Friday’s decline, losers swamped winners 15 to 4 on the NYSE, an extremely negative ratio.
Many of the day’s biggest losers were stocks that had soared earlier this year on expectations of decent economic growth.
Auto stocks, for example, slumped badly. Ford tumbled 1 3/4 to 38 3/4, GM lost 1 3/8 to 34, and Chrysler fell 1 to 19 1/2.
Also, appliance giant Maytag announced that its earnings in the current quarter are likely to be 33% below year-ago levels. The company cited the weak economy. Its stock dropped 1 3/8 to 12 7/8.
While many money managers downplayed the idea that the United States might fall back into recession, they said the dollar’s decline and the slide in industrial stocks represent a reassessment of the chances for a meaningful economic rebound anytime soon.
“The dollar’s fall is a symptom of a more sober outlook of the future,” said Ken Heebner at Capital Growth Management in Boston.
Still, that reassessment doesn’t mean that investors will abandon stocks en masse, leading to a crash, most experts said. More likely is that the stock market will continue to edge lower as sellers dominate at the margin, but most investors choose to sit tight.
“I don’t think it’s ready to tank big time,” said Peter Anderson, manager at Federated Investors in Pittsburgh. While economic growth may slow, he said, “to us, it’s now a question of whether we’re going to have just 2% or 2.5% (GDP growth) or whether it will be something higher.”
As long as investors have reason to expect an economic recovery in 1993--and as long as interest rates don’t rocket significantly from here--Anderson believes that most stock investors will remain in the market.
Dean Witter’s Dodge, however, is worried that while many investors now are ignoring the dollar and other warning signs of a weaker economy, they will wake up one day this fall to realize that their expectations for corporate profit growth are wildly optimistic. That’s why he advised clients to take more chips off the table.
“We’re concerned about the forward momentum in the economy. Analysts’ earnings estimates for the second half of the year strike us as way too high,” he said.
What’s more, he noted, October and November have frequently been terrible months for stocks. So it’s conceivable many investors could choose to exit in the weeks ahead rather than risk a big downdraft later in the fall, he said.
Among U.S. stock highlights:
* Industrial stocks leading the market’s decline included PPG Industries, down 3 1/4 to 60 3/4; USX-U.S. Steel, down 1 1/8 to 24 3/4; Alcoa, off 1 1/8 to 63 5/8; IBM, off 7/8 to 85 1/8, and Cummins Engine, which fell 1 7/8 to 64 1/4.
* Banking and financial issues dropped, victims of the rise in interest rates. Union Bank lost 1 1/4 to 22 1/4, Golden West Financial sank 1 3/8 to 40 1/4, Wells Fargo fell 1 3/8 to 68 1/4, First Chicago dropped 1 1/4 to 31 3/4, and Countrywide Credit tumbled 1 3/4 to 24 3/4.
* One of the few strong stock sectors was energy. Oil prices jumped as Hurricane Andrew tore into the Gulf of Mexico, a major oil and gas production ground. Traders bet on a disruption of supplies that could lift prices.
Crude oil for October delivery rose 46 cents to $21.54 a barrel on the New York Merc.
Among oil stocks, Exxon rose 1 to 64 1/4, Chevron added 7/8 to 72 1/8, and Pennzoil jumped 1 1/4 to 52 7/8.
* Gold stocks also gained as gold’s price rose. The metal benefits when investors flee the dollar and seek safe haven in commodities. Among gold producers, Newmont Gold rose 5/8 to 41 1/8, ASA added 5/8 to 36 7/8, and Homestake Mining jumped 3/4 to 13.
* El Segundo-based Aura Systems was unchanged at 3 1/4. The technology company was granted a temporary reprieve by the NASDAQ market, which had been considering delisting the stock because Aura still hasn’t filed financial statements for its fiscal year ended last February.
1987 All Over Again?
The dollar’s latest plunge has sparked a rise in interest rates and a drop in stock prices-reminiscent of the pattern in the fall of 1987, when U.S. and foreign governments couldn’t agree on how to stop the dollar’s slide.
In 1987, a sinking dollar...
Index of dollar’s value versus basket of foreign currencies (1982 equals 100)
3-month Treasury bill yield (weekly averages)
Dow Jones industrial average
