The battered dollar plunged toward its post-World War II low against the Japanese yen Friday before the federal government unexpectedly intervened and carried the greenback to a small gain by the end of the day. But the dollar still fell against major European currencies.
Meanwhile, stocks closed mostly higher, helped by the government’s intervention in currency markets and Ford Motor Co.'s strong quarterly earnings report.
However, concern about the dollar helped drive Treasury bond yields up, as some traders worried that a weak U.S. currency would lead to greater inflation.
The Federal Reserve Bank of New York’s decision to buy dollars, announced in a brief statement by Treasury Secretary Lloyd Bentsen, marks the first time since August that the government has intervened to prop up the dollar against the yen.
The dollar, which had been threatening to fall below 100 Japanese yen for the first time, closed in New York at 101.50 yen Friday, up 0.15 yen for the day.
It had fallen to 100.65 yen earlier in the day, just above a postwar low of 100.35 set in August. A week ago, the greenback was at 103.26 yen, and it began the year at 111.85.
The dollar had been pushed lower Thursday after the government reported slower-than-expected first-quarter economic growth. A weak economy generally leads to a weaker currency, in part because slow growth usually means lower interest rates, which make a nation’s bonds less attractive to foreign investors.
So far this year, however, short- and long-term U.S. interest rates have been rising, not falling. Yet that has failed to bolster the dollar.
Some analysts said the currency’s weakness has been exacerbated by the selloff in stock and bond markets this year, leading both foreign and domestic investors to question the value of the dollar.
Indeed, the Treasury’s decision to intervene Friday, via the Fed, was aimed in part at calming investors, analysts said.
“The Treasury wanted to show investors that it’s still safe to invest in U.S. stocks and bonds,” said Ezra Zask, head of Ezra Zask Associates, a hedge fund in Norfolk, Conn.
Other analysts said the decision to halt the dollar’s decline signaled a change in the Clinton Administration’s trade policy toward Japan.
Since February, the Administration has allowed the dollar to decline versus the yen to make U.S. exports cheaper in Japan and Japanese exports more expensive here, an effort to force open Japan’s markets and shrink its trade surplus with the United States.
With the dollar poised to fall below 100 yen, however, the psychological impact on U.S. investors and on Japan may have been judged too extreme by the White House, some experts said.
“If the Fed buys dollars for yen again, the market will get the message that the Administration isn’t being as tough on Japan,” said Earl Johnson, foreign exchange adviser at Harris Trust & Savings.
In any case, the Fed’s intervention failed to stop the dollar’s fall against the German mark Friday. The greenback closed at 1.654 marks in New York, down from Thursday’s 1.663. At the start of the year, a dollar bought 1.738 marks.
“The Fed broke the dollar’s free fall, that’s all,” said David De Rosa, trader at Swiss Bank Corp.
In Tokyo, the Nihon Keizai newspaper said today that the Bank of Japan will step up efforts to boost the dollar against the yen. The bank will buy about $3 billion in the market a day, compared to $1 billion currently, the paper said.
The U.S. stock market, meanwhile, appeared to take heart from the government’s support for the dollar. The Dow Jones industrials added 13.38 points to 3,681.69 on Friday, and broader market indexes generally posted bigger gains.
On the Big Board, winners topped losers by 13 to 9.
“We have a market that is trying to stabilize,” said Jonathan Dodd, analyst at Dean Witter. The Dow rose 33.01 points for the week.
Stocks’ gains Friday were all the more remarkable given another bad day in the bond market. The yield on the Treasury’s benchmark 30-year bond, which had shot from 7.10% to 7.26% on Thursday, rose Friday to 7.30%.
The bond market had been spooked Thursday when the government reported that a key measure of inflation had risen in the first quarter, even as the economy slowed. Rising inflation causes bond investors to demand higher yields to compensate.
The weak dollar added fuel to the fire on Thursday and Friday, because a falling currency raises the risk of more inflation by boosting prices of imported goods. Strength in gold, oil, lumber and other commodities also hurt bonds. The Commodity Research Bureau’s price index rose nearly 1% on Friday.
Among Friday’s stock highlights:
* Ford Motor’s healthy earnings report boosted its shares and helped sentiment toward other industrial shares. Ford gained 7/8 to 58 3/8, Illinois Tool Works added 1 to 41 3/8, ITT jumped 1 3/8 to 89 3/4, Scott Paper surged 1 5/8 to 42 7/8 and machine tool builder Acme Cleveland leaped 2 7/8 to 15 1/4.
* Transportation issues also jumped on reports of a tentative settlement in the Teamsters strike and renewed interest in airlines. Consolidated Freightways rose 1 1/4 to 27 1/2, Union Pacific gained 1 1/8 to 59 and Delta Air Lines soared 2 1/4 to 47 1/2.
* Other strong stock groups included electric utilities, retailers and golf-related issues.
Overseas, London’s FTSE-100 index ended the week at 3,125.3, off 4.6 points. Frankfurt’s DAX index eased 5.24 points to 2,245.98. Mexico City’s Bolsa index fell 27.13 points to 2,294.1. The Tokyo market was closed for a holiday.
Market Roundup, D4
DAILY DIARY Interest Rates: 30-year T-Bond 7.30% 1-year T-Bill 5.07%