Massive dollar purchases by the Federal Reserve Bank of New York and other world central banks halted the buck’s steep decline Wednesday, which also helped the bond market stabilize.
In the stock market, prices were mixed in relatively slow trading, as some investors took to the sidelines. The Dow Jones industrials fell 16.66 points to 3,697.75.
The dollar was the day’s big financial story, as the Clinton Administration signaled for the second time in a week that it would defend the currency’s value.
The Fed, acting on behalf of the Treasury Department, bought dollars with other currencies in a strong show of support for the greenback.
Also buying dollars with the Fed were 15 other world central banks. In total, analysts estimated, the central banks bought $3 billion to $5 billion, much or most of that with German marks.
At least for the time being, the intervention worked: The dollar surged to 1.654 marks in New York, up from 1.637 on Tuesday.
The dollar also jumped to 101.85 Japanese yen from 101.05 on Tuesday.
Economists have been flabbergasted this year by the dollar’s weakness, because the strength of the U.S. economy and the recent rise in U.S. interest rates normally would be expected to boost the dollar’s value.
The Administration’s sudden decision to defend the dollar stems in part from fears of higher inflation, because a weak dollar raises import prices in the United States. A weak dollar also makes foreigners less willing to invest here.
Also, there is a widespread feeling that a rapid decline in the dollar, as with any other financial asset, would be dangerous for the global financial system.
“Two things are in the interest of all (industrialized) nations,” said John Williams, chief economist at Bankers Trust. “One is stability in foreign exchange markets and the second is the case that a stronger dollar is appropriate to slow the U.S. economy and help spur other economies.”
A stronger dollar could lower prices of goods imported into the United States, helping European and Japanese manufacturers while making it harder for U.S. manufacturers to raise prices.
In the bond market, where the dollar’s weakness had raised concerns about an outflow of foreign capital from U.S. bonds, yields stabilized Wednesday. The yield on the 30-year Treasury bond slipped to 7.33% from 7.34% on Tuesday, after challenging the 7.40% level at midday.
But Robert Hormats, vice chairman of Goldman Sachs, said the bond market’s rather unenthusiastic response signaled a judgment that “the intervention will not be sustained or not work.”
Bonds were also helped by news of weaker-than-expected April car sales, which hinted at slower economic growth.
In other bond market news, the Treasury said it will sell $29 billion of government securities next week.
Meanwhile, on Wall Street, blue chip stocks eased after three days of gains. Losers outnumbered winners by about 4 to 3 on the New York Stock Exchange. Smaller stocks fared better: The Nasdaq composite index inched up 0.93 point to 740.30.
Some traders said investors were beginning to focus on the possibility that higher interest rates and a strong dollar will significantly slow the economy later this year.
Among the market highlights:
* Many industrial issues closed lower, led by auto makers. Ford lost 1 to 60, GM fell 5/8 to 56 3/4 and Chrysler was off 1/8 to 47.
Among other industrials, Air Products & Chemicals dropped 1 5/8 to 41 1/4, Varity fell 7/8 to 38, Monsanto slid 1 to 81 1/2 and Phelps Dodge sank 3/4 to 56 3/8.
* In another health care takeover, Allied Clinical Labs surged 5 3/8 to 22 5/8 on a takeover offer from National Health Laboratories, which ended off 1/8 to 11 3/4.
* Among Southland issues, First Interstate Bancorp rose 1 3/4 to 82 3/4 after its chairman said the bank expects to exceed recently revised 1994 earnings estimates.
Also, brokerage Jefferies Group leaped 2 7/8 to 43 7/8. It sold 3.7 million shares of its Investment Technology Group division to investors in a new stock offering. The stock, offered at 13, jumped to close at 16 1/4 in Nasdaq trading.
Overseas, Hong Kong stocks finished near their lows for the year, with the Hang Seng index plunging 309.69 points to 8,369.44.
In London, the FTSE-100 index fell 29.5 points to 3,070.5 while Frankfurt’s DAX index eased 3.27 points to 2,249.02. Mexico City’s Bolsa index was off 4.11 points at 2,235.12.
The Tokyo market was closed for the “Golden Week” holidays.
* AVERTING CRISIS: Nations propped the dollar to boost world’s economy. A1