MARKET TURMOIL CLOUDS THE RECOVERY : As Dollar Fades, So Does Optimism : Dow Loses 62 Points, Bond Prices Skid as Rate Hike Fears Grow
Stock and bond prices took another drubbing Friday after central banks worldwide failed in their effort to bolster the dollar against other currencies, thus enhancing fears that the Federal Reserve Board will again raise U.S. interest rates.
The Dow Jones average of 30 industrials tumbled 62.15 points to 3,636.94--its worst daily decline since losing 72.27 on March 30, dropping the blue chip average to its lowest level in six weeks.
It was the average’s fifth loss in six sessions, during which the industrials have skidded 174.40 points, or 4.5%. This week alone, the Dow industrials suffered their worst pummeling since mid-October, 1989.
Losers overall swamped gainers by nearly 5 to 1 on the New York Stock Exchange, but the session was not a rout. Big Board volume was a moderate 261 million shares, well below the average daily turnover so far this year.
In the credit markets, government bond prices skidded and their yields soared amid investors’ expectations that the Fed will now try to prop up the dollar by raising U.S. interest rates for the fifth time this year.
The Treasury’s bellwether 30-year bond lost more than 1 1/4 points, or $12.50 for every $1,000 in face value, while its yield jumped to 7.52% from 7.40% on Thursday.
Stocks came under pressure at the opening bell, with traders knowing that foreign stocks had already plummeted on news that the Fed and several other central
banks had been unsuccessful in propping up the dollar by directly buying the greenback in currency markets.
Indeed, after only 90 minutes of trading, the Dow had lost more than 50 points, which activated the New York Stock Exchange’s “circuit breaker” constraints designed to limit the market’s volatility. The constraints stayed in place for the rest of the day.
“The big disappointment today is we had a concerted effort to support the dollar, and the currency traders won,” said Gail M. Dudack, market strategist at S.G. Warburg & Co. in New York. “Now there’s this whole pallor that just hangs over the market.”
The dollar traded late in the day at 100.45 Japanese yen, down 0.80 yen from Thursday and near a post-World War II low. It was down 0.019 German marks at 1.584, a one-year low.
With the greenback still in retreat, investors “are nervous that the Fed is going to have to raise interest rates to correct the decline in the dollar,” said Stephen E. Keane, research director at the Robert W. Baird & Co. brokerage in Milwaukee.
Among other things, the dollar’s weakness prompts foreign investors to dump dollar-denominated stocks in search of better returns from investments based in other currencies. Because they expect the Fed to drive rates higher in defense of the dollar, investors also pushed bond prices lower, which in turn lifts the bonds’ yields.
There is also concern that if U.S. rates keep climbing, they will dampen the nation’s and state’s economic growth and lead to disappointing corporate profits, which could also push stocks lower.
After the opening plunge, stocks stabilized for much of the session but then resumed their decline in the final hour. Analysts said the moderate trading volume showed that many investors took to the sidelines, waiting to see what the Fed does next.
“We tried to rally in the middle of the day but couldn’t,” said Jeffrey Logsdon, head of equity research for Seidler Cos. in Los Angeles. “You really had a buyers’ strike going on.”
Not entirely. David Diamond, a small-stock specialist at Boston Co., noted that bargain-hunting traders snapped up several technology issues that had plunged a day earlier. Cisco Systems rose 1 1/8 to 22 1/8, Newbridge Networks gained 1 1/4 to 30 1/8 and Cabletron Systems recovered 1 1/2 to 86 1/2 after plunging 5 3/4 on Thursday.
But the overall results were grim. The Nasdaq composite index, which took a beating Thursday as those technology stocks fell, lost another 7.06 to close at 693.79, a 12-month low.
Among other averages measuring the broader market, the NYSE composite index fell 3.74 to 244.55, the Standard & Poor’s 500 index dropped 6.83 to 442.80, and the American Stock Exchange’s market value index lost 4.95 to 426.30.
On the NYSE’s active list, Compaq Computer fell 1 1/4 to 31, General Motors slipped 1/8 to 50 5/8 and PepsiCo lost 3/8 to 30 3/4, but Eastman Kodak rose 1/4 to 47 3/4.
Financial issues fell for the second straight day amid expectations that rising rates will carve into their profits. First Interstate Bancorp fell 7/8 to 74 5/8, Wells Fargo dropped 2 3/8 to 151 3/8 and Citicorp was off 1/4 at 38 7/8.
The declines on foreign stock markets included Tokyo, where the Nikkei 225-share average dropped 273.46 points, or 1.3%, to 20,766.75.
In London, the Financial Times 100-share average tumbled to an 11-month low, losing 65.8 points, or 2.24%, to 2876.60. In Frankfurt, the 30-share DAX index fell 16.79 to 2005.31.
Mexico City’s Bolsa index fell 55.66 points, or 2.5%, to 2187.27.
Market Roundup, D3
* INTERVENTION FAILS: Central banks of 17 nations unsuccessfully try to prop up the beleaguered dollar. A1
Selected Interest Rates
Averages of daily rates ended Thursday, in percent.
Corporate AAA bonds: 8.05%
90-day CDs: 4.51%
3-month Treasury bills: 4.17%
Bank prime rate: 7.25%
Municipal bonds: 6.04%
Federal funds rate: 4.19%
Discount rate: 3.50%
Source: Federal Reserve Board
