FINANCIAL MARKETS : Dollar Shows Some Life; Dow Higher on IBM Surge
The dollar shot up against the German mark and rose against other major currencies Thursday as Treasury officials and German central bankers spoke out firmly in favor of a stronger dollar.
Meanwhile, short-term Treasury bond yields were higher and the long bond was flat as investors anticipated that the Federal Reserve Board will raise interest rates again soon to contain inflation.
At the same time, stocks were mixed, with blue chip shares pushed higher by IBM and other companies whose second-quarter profits beat predictions by Wall Street prognosticators.
In the most explicit dollar-supportive talk to come out of the government since the greenback’s latest descent began a few weeks ago, Treasury Undersecretary Lawrence Summers said in Senate testimony that a stronger dollar “would have important economic benefits for the United States” and would restore confidence in financial markets.
Summers comments came on the heels of Fed Chairman Alan Greenspan’s statements Wednesday that a weak dollar could ignite inflation.
Taken together, the comments did for the dollar what two coordinated buying efforts have failed to do in recent months: prop up the beleaguered currency and change dealers’ perception that the government prefers a weak dollar to counter the U.S.-Japan trade imbalance, traders said.
“It’s verbal intervention,” said Kevin Lawrie, director of foreign exchange at Mellon Bank. “They’re doing better with these comments than they did when they were buying dollars.”
Traders said Summers’ and Greenspan’s comments, combined with dollar-supportive statements made earlier in the day by officials of Germany’s central bank, reversed negative sentiment against the dollar among many market participants.
In New York, the U.S. currency jumped nearly three pfennigs to close at 1.593 German marks from Wednesday. It was one of the largest single-day dollar-mark jumps in several months.
The dollar also rallied against the Japanese yen, fetching 99.20 yen, up from Wednesday’s 98.65.
Some traders suggested that the dollar’s rally was not a one-day event, and suggested that the momentum achieved Thursday could last.
“A lot of things came together at once,” said Chris Igo, international economist at Chase Manhattan Bank. “There’s been a fundamental change in market sentiment, and there’s reason to think that we’ve built a higher base.”
In the credit market, the yield on the benchmark 30-year Treasury bond closed unchanged. Its price, which plunged 7/8 point Wednesday, ended 1/16 point higher, or about 63 cents per $1,000 in face value.
Prices of short-term maturities, meanwhile, dropped from 3/32 point to 5/32 point and intermediate maturities lost as much as 3/16 point, the Telerate Inc. financial information service reported.
Analysts attributed the mixed performance to lingering reverberations from Greenspan’s warning Wednesday that the Fed is prepared to push short-term rates higher if inflation reasserts itself.
While there wasn’t much new in Greenspan’s comments, the markets had started to assume that with the economy slowing, inflation was tame enough to delay any immediate rate hikes.
Yields on three-month Treasury bills rose to 4.42% as the discount rose 0.04 percentage point to 4.32%. Six-month yields rose to 4.90% as the discount rose 0.04 point to 4.73%. One-year yields rose to 5.40% as the discount rose 0.05 point to 5.14%.
On Wall Street, the Dow Jones industrial average closed at 3,732.45, up 5.18 points, largely on the strength of IBM. Broader market averages were also up slightly. However, declining issues outnumbered advancers by an 8-7 margin on the New York Stock Exchange, where volume swelled to 290.80 million shares from 268.04 million on Wednesday.
IBM gained 6 1/2 to 62 3/8. The computer giant reported second-quarter profit of $1.14 a share, about twice what analysts had expected.
“The market today is one stock--IBM. That is the story of the day and the story of the week,” said Lawrence Rice, chief market strategist at Josephthal Lyon & Ross in New York.
The Dow’s gain would have been even better had United Technologies not reported a profit of $1.25 per share. Although it was near consensus predictions, investors weren’t satisfied and the defense and aerospace company’s shares lost 3 7/8 to 62 1/2.
Among other companies influenced by positive earnings reports, Sears was up 1 3/8 to 47 3/8 and Kimberly Clark gained 1 1/4 to 55 1/2.
Market analysts said this quarter’s earnings reports have generally been favorable, but investors are skittish about those who fail to meet expectations.
Among the market highlights:
* Other computer stocks rallied with IBM. Compaq advanced 5/8 to 32 1/8, Apple gained 1 3/8 to 28 and Dell climbed 7/8 to 26 5/8.
* AT&T; ended up 5/8 to 53 3/4 after reporting a 8.7% jump in revenues.
* Integrated Device Technology, a maker of high-performance semiconductors, lost 7 3/16 to 18 3/4 after it reported a rise in quarterly profit but said it was cautious about its future business. Alex. Brown & Sons downgraded the stock.
* Johnson & Johnson rose 1 5/8 to 46 3/8. Merrill Lynch upgraded its rating on the health care products company on Wednesday after J&J; posted strong results.
* Cerner surged 6 7/8 to 32. The clinical information systems company posted a strong second-quarter profit, prompting upgrades from several brokerages.
Foreign markets were mixed. German stock prices fell, with the DAX 30-share average closing down 25.35 points at 2,113.30, while Tokyo’s 30-share Nikkei average ended off 157.84 points at 20,622.92.
In London, the Financial Times 100-share average ended up 17.9 points at 3,095.1, while in Mexico City, the Bolsa index rose 21.86 points to close at 2223.88.
