Dollar Tumbles as Bid to Buoy Currency Falters
In a day of financial turbulence and political finger-pointing, the dollar tumbled Friday, as an alliance of 17 nations failed in its bid to buoy the beleaguered U.S. currency.
In turn, stocks plunged and bond yields jumped amid fears that the Federal Reserve would have to raise interest rates to make the dollar more attractive--which could slow U.S. growth and hurt company profits.
Central banks of countries as large as Germany and as small as Portugal teamed up to buy billions of dollars in their rescue effort.
But after a brief, midmorning recovery, the greenback wilted further, prompting criticism of President Clinton’s leadership and fears of higher rates.
“Can you believe Ireland defending the U.S. currency?” said William V. Sullivan Jr., director of money market research at Dean Witter Reynolds in New York. “Things are bad.”
The Dow Jones industrial average closed down 62.15 points Friday, the sharpest one-day fall in almost three months. The dollar finished the day at 1.58 German marks, its bottom for the year, and 100.42 yen--slightly above its post-World War II low reached earlier this week.
In the search for blame, the rising U.S. trade deficit and prospects of faster growth overseas were among the explanations offered Friday by economists. Yet political symbolism--in America and overseas--may be the driving force behind the dollar’s current unpopularity with investors, analysts also said.
Clinton’s foreign policy leadership has caused many currency traders to downgrade the dollar. Unsatisfactory U.S. trade squabbles with Japan and China, an appearance of White House indecision on North Korea and other problems all were cited Friday.
Sensitive to the symbolism of a teetering national currency as well as the economic risks it raises, Clinton maintained Friday that the dollar was somehow moving in the opposite direction of the healthy U.S. economy.
“This is a development that is puzzling a lot of economists because our economy is performing so well,” the President told KMOX Radio in St. Louis by telephone from Air Force One. “In a funny way the currency values are running in the opposite direction of economic strength.”
However, Administration critics seized on the unsettling financial news. Sen. Pete V. Domenici (R-N. M.) described the dollar’s travails as a “global vote of no confidence” in Clinton Administration policies.
“I, among many others, attribute this recent precipitous drop in the dollar to a worldwide lack of confidence in U.S. leadership that threatens prospects for sustained future U.S. economic growth,” he said in a Senate speech.
One economist, who asked not to be named, offered a more blunt appraisal: “Wall Street despises Clinton, because he’s a Democrat. There’s some of that going on here.”
Part of the explanation may be found overseas, according to some experts. The view that Japan’s government may soon fall again has lowered expectations that Japan will settle trade disputes with the United States anytime soon.
On top of that, the appearance of weak governments in Japan and the United Kingdom takes credibility away from central bank efforts to stabilize the dollar and emboldens speculators to gamble that the dollar’s plunge will continue, analysts said.
“People are saying how can these weakened governments support the dollar?” said Sullivan, pointing out the price tag for Friday’s rescue operation may be in the $4-billion range. “They know there isn’t the political will to do this on a sustained basis.”
The symbolic benchmark of 100 yen-per-dollar has become a key battle line between speculators and central bankers in recent days. The line was breached briefly on Tuesday before the dollar edged back upward. The dollar also flirted with 100 yen in early Friday trading.
For the Fed, which is responsible for protecting the nation’s currency, this is a major headache.
If massive dollar purchases prove insufficient to prop up the currency, the central bank will face increasing pressure to do so by boosting interest rates.
And such rescue efforts are dubious. Just last month, for example, a concerted effort to buy dollars, perhaps in the $5-billion range, combined with a German interest-rate cut to calm the markets, but only temporarily.
Higher interest rates make dollar-denominated investments more lucrative to investors, thus strengthening the currency. Yet further rate hikes would also slow the U.S. economy, which is already cooling off from the hectic pace of growth in late 1993.
“The dilemma for the Fed is clear,” said Carol A. Stone, an economist at Nomura Securities International in New York. “You don’t want to make conditions worse.”
There are other reasons why the Fed would rather not raise interest rates to protect the dollar.
“What happens the next time the dollar is weak?” asks Richard D. Rippe, chief economist at Prudential Securities. “The Fed would be inviting speculation that it might tighten again.”
The slumping dollar poses a dilemma for Wall Street as well, where the Dow industrial average plunged 139.84 points for the week--or 3.7%--to close at its lowest finish since May 9.
Ordinarily, the current economic climate, which features moderate growth and next-to-no inflation, would be a prescription for happy investors. Yet rising interest rates this year have hammered bond values--and stock prices have followed.
That pattern was evident Friday, as the 30-year U.S. Treasury issue dropped more than 1 1/4 points, or $12.50 per $1,000 face amount; its yield jumped to 7.52% from 7.4% Thursday.
“In the short run, uncertainty is the dominant issue,” Rippe said.
The dollar began falling early Friday, sliding against the Japanese yen in overnight trading to 100 yen, a nearly 50-year low. Shortly after the U.S. markets opened for business, the central banks rushed in with large purchases, intended to catch speculators off guard and alter the dollar’s course for the day.
The Fed, Germany’s Bundesbank and central banks of Japan, the United Kingdom, France, Canada, Austria, Belgium, Denmark, Greece, Italy, Switzerland, Portugal, Norway, the Netherlands, Ireland and Spain all reportedly participated in the rescue operation.
Word of the banks’ efforts spread through trading rooms at about 9:30 a.m., and the dollar rallied for about 90 minutes.
By midday, however, it lost its momentum and began to drift sideways or lower, traders said.
Yet if the episode was unresolved on Friday, few observers were confident that the central banks could prevail over the currency markets.
“They’d have to do it (buy dollars) on a much larger scale than they did today, and I think they’d have to keep doing it repeatedly next week,” said Bruce Steinberg, an economist with the Merrill Lynch investment firm in New York.
Longer term, economists said, recoveries in Japan and Western Europe will pick up steam, meaning that the demand for U.S. exports will surge--shrinking the U.S. trade deficit--and the dollar is likely to edge upward once more.
Short term, however, many were betting on a lower dollar.
“This is the central bank version of the World Cup--and they’re losing,” Michael Strauss, chief economist at Yamaichi International (America), told Reuters.
* CALIFORNIA BLUES: Rising rates further threaten the state’s recovery. D1
* MARKET DECLINE: Stocks and bonds sell off. D1
