Dollar Tumbles to a Record Low, Then Recovers
The beleaguered U.S. dollar tumbled to another record low against the surging Japanese yen early Monday before edging upward and restoring calm to worldwide currency markets.
Yet, even as stability returned to agitated markets later Monday and the stock market rallied, currency traders warned that the dollar’s rough ride was not over, and a key Federal Reserve-watcher predicted a U.S. interest rate hike next week.
The dollar’s dramatic tumble threatens nascent economic recoveries in Japan and Western Europe, economists said, raising expectations of new, concerted action to stabilize the world’s volatile system of currencies. Indeed, the White House acknowledged Monday that the dollar’s travails will be on the table when the world’s seven leading industrial powers meet next week.
“It is our view . . . that further appreciation of the mark and yen would be counter-productive for global recovery,” said a senior U.S. Treasury Department official, who declined to be named, noting that America’s major trading partners share the view.
The Dow Jones industrial average jumped up 48.56 points Monday, as investors responded to growing calm in the currency markets. The dollar closed at 100.45 Japanese yen in New York trading, unchanged from Friday, and at 1.5835 German marks, down from 1.5840.
An alliance of 17 nations loaded up on dollars late last week in a failed bid to shore up the dollar, which has been battered by the perception of weak U.S. leadership, a rising trade deficit and prospects for faster growth overseas.
But anticipation that there could be a currency-stabilizing accord at the G-7 meeting of industrial nations in Naples--while speculative--”is a reason the dollar stopped tumbling today,” said Irwin L. Kellner, chief economist at Chemical Banking Corp. in New York.
Currency traders cannot rule out that “there just might be some big move” to steady the dollar, yen and Western European currencies, he said.
Another way to bolster the dollar is to raise interest rates, making U.S. investments more attractive, even though some economists warn that such action could jeopardize an already slowing national recovery.
On Monday, a key Fed-watcher predicted that an interest rate hike was in store when the Fed’s Open Market Committee meets next week.
Former Federal Reserve governor Wayne Angell, a noted inflation hawk, predicted the Fed would hike its discount rate--the rate charged to member banks--by half a percentage point. Now chief economist at Bear, Stearns & Co. in New York, Angell cited investors’ fears of rising inflation as one of the reasons the dollar has slumped.
“I see it (the rate hike) coming as a result of a weak domestic dollar,” Angell told Bloomberg Business News.
The international scope of the currency problem was most obvious Monday in Japan, where the rising yen looms as a major threat to a fledgling recovery.
A strengthening currency should push up prices for a nation’s products, thereby cutting into exports, economic theory suggests. But when the yen rose against the dollar in the 1980s, Japanese producers rewrote the textbook.
Rather than hike prices, they accepted the pain of lower profits in order to hold onto customers. They also cut costs and boosted productivity, but such strategies take time to implement and pay off.
The dollar lost more than 40% of its value against the yen in the late 1980s; This year alone, it has fallen about 10% against the yen and 9% against the German mark.
For now, at least, the stronger yen “is going to discourage new investment,” predicts Michael J. Moran, chief economist at Daiwa Securities America. “It’s going to reduce bonus payments to workers. It’s going to prevent rallies in their stock market.”
Widely overlooked in the dollar’s recent decline is the extremely selective nature of the currency slide.
The U.S. dollar actually has risen against the Canadian dollar and Mexican peso, its overall value increasing 15% from 1992, according to an analysis by Chemical Banking Corp. that factors in the relative amount of U.S. trade with other countries.
Nevertheless, the spectacle of a dollar plunging against the powerful currencies of Japan and Germany carries great weight among international investors.
“In terms of how the dollar is looked at globally, it’s never against Canada and Mexico,” observed Robert A. White, senior vice president of Standard Chartered Bank, a London-based bank active in Asia and Africa. “The problems that are afflicting the dollar have not gone away.”
These problems include perceptions of weak foreign policy leadership in the United States and an incoherent trade policy, economists said Monday. In addition, the resignation of Japanese Prime Minister Tsutomu Hata reduces the likelihood of a trade agreement with the United States anytime soon.
On top of all that, a rapidly growing U.S. trade deficit and expectations of faster economic growth overseas may be reflected in the dollar’s weakness.
“A large amount of selling is coming from European investors, where the sentiment against the dollar is very negative,” explained Bernard Garra, head currency trader at Ruesch International in Washington.
“Over the last year the Europeans invested a lot in the dollar because the environment in Europe was poorer. Now a lot of them are coming out of the dollar and into the deutsch mark because of the prospects of long-term growth in Germany.”
Some also believe the Clinton Administration has not been persuasive in its declarations of support for the dollar--reinforcing the view that U.S. officials see the decline as a useful way to put pressure on Japan.
“We still don’t have a unified, forceful statement on behalf of the dollar by the U.S. government,” said Gary Schlossberg, an economist at Wells Fargo Bank in San Francisco.
In Asian trading early Monday, the dollar sank through the symbolic floor of 100 yen--a floor that had held up for decades until recently--prompting furious yet futile moves by the Bank of Japan to stabilize the greenback.
The Bank of Japan, intervening in the currency market, bought about $2 billion in a vain attempt to keep the dollar above 100 yen, Japanese media reported. The central bank does not officially disclose details of its currency transactions.
Still, the dollar closed at 99.93 yen in Tokyo trading. The dollar rebounded slightly early today, closing Tokyo’s morning trading at 100.20 yen, up 0.27 yen from Monday’s close.
On Monday, the dollar rose somewhat in European and North American trading to finish above its recent lows. Yet many traders are not convinced that countries, through their central banks, have the means or determination to withstand the force of private speculators, who can bet many billions of dollars on the direction of a currency.
Traders generally agreed that the test for the dollar is far from over.
“The trading community can’t seem to get confident with the idea of the dollar going higher,” said Glenn Cole, manager of Forex sales at Credit Suisse, New York.
Contributing to this story were Michael Hiltzik in Los Angeles and David Holley in Tokyo.
* MARKETS RALLY: Stocks and bonds rebound. D1
