FINANCIAL MARKETS : Dollar Unsettles Stock Market; Treasury Dept. Avows Support : Wall Street: Contradictory signals by top officials send traders scrambling. Dow falls 19.85; bonds stabilize.
The embattled dollar edged upward on financial markets Friday, following comments by top Treasury Department officials that the United States will buy greenbacks if necessary to safeguard the currency’s value.
“We’re in the last legs of this downward move in the dollar,” said Robert A. White, senior vice president at Standard Chartered Bank in New York. “The fundamentals dictate that the dollar should be higher.”
But uncertainty continued to surround the U.S. currency, unsettling the stock market for the second straight day with fears of inflation and rising interest rates. The Dow Jones industrial average closed down 19.85 points at 3,891.30. The bond market stabilized, with the 30-year Treasury bond yield slipping to 7.98% from 7.996% at Thursday’s close.
The dollar, meanwhile, flirted with record lows before ending higher.
It regained some ground against the German mark to end at 1.4995 marks in New York, up from 1.4923 on Thursday, the lowest level in two years. It was valued at 97.19 Japanese yen, compared to 97.10 yen the day before. Early Friday, it closed in Tokyo at 96.98 yen, the lowest finish in Japan since the modern exchange rate system was set up in the late 1940s.
“When the dollar depreciates, the (stock and bond) markets assume that it’s another reason for (the Federal Reserve Board) to raise interest rates,” said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. “It scares the heck out of them.”
Bewildered currency traders Friday had to scramble to follow an unusual series of policy statements on the dollar that emanated from the highest levels of the Treasury Department.
That mini-drama began Thursday, when Treasury Secretary Lloyd Bentsen said U.S. officials had no plans to prop up the currency’s value through intervention--massive dollar purchases by the United States and other nations. Currency speculators took Bentsen’s remark as a green light to bid down the dollar, which plunged against the German mark, Japanese yen and British pound.
But Treasury officials were apparently uncomfortable with that spectacle. The dollar has fallen almost 2% against the mark and 1.4% against the yen this month alone.
So Treasury Undersecretary Lawrence Summers, Bentsen’s lieutenant, switched signals by declaring Friday that “there are times when intervention is appropriate.”
Finally, Bentsen released his own statement that intervention could be “effective,” adding that “we are concerned about recent movements in the dollar. As we have said, we prefer a stronger dollar.”
The dollar stabilized following the remarks, bringing a pause to the weeklong gyrations.
Private investors began moving against the dollar Monday, interpreting the election victory of German Chancellor Helmut Kohl’s coalition as a sign of stability in the mark. Those sentiments were reinforced by upcoming U.S. elections and skepticism about President Clinton’s policies, which make the dollar less attractive to foreign investors, analysts said.
Experts also said basic economic forces have undermined the dollar.
The ongoing U.S. trade deficit means that billions and billions of dollars continue to flow out of the country, creating a surplus in the world and cheapening their value.
Investors seemed to respond to this phenomenon earlier this week, when the dollar tumbled against the yen on news of an expanding U.S. trade gap with Japan.
Norwest’s Sohn estimated that the 1994 and ’95 overall deficits in the nation’s current account--the broadest measure of the trade balance--could total $250 billion.
“It’s one of the reasons the dollar is doing especially poorly,” he said.
In a seeming paradox, however, the dollar’s exceptionally low level could prove self-correcting, economists said. That is because a weak dollar provides U.S. exporters a price advantage against their foreign rivals, paving the way for progress in the trade deficit.
“You gotta like the dollar,” wrote Stephen Roach, an economist at Morgan Stanley, in a recent analysis that forecast steady improvements in the trade deficit, propelled by efficient U.S. industry and growing purchases of American goods by recovering nations overseas.
In the short run, however, many analysts are scratching their heads over Bentsen’s initial hands-off comment and the subsequent clarifications that ensued.
Said one observer: “I was at the Fed yesterday, and they were shocked that he (Bentsen) would say that.”
Still others maintain there was logic behind the secretary’s comment, however inflammatory the words may have sounded to financial speculators. Many experts believe that in the long term it has become a futile exercise for national governments to challenge the will of the huge private market in currencies.
“It was one of the first sensible comments on foreign exchange that I’ve heard coming out of the Treasury,” said Cynthia Latta, an economist with DRI-McGraw Hill in Lexington, Mass.
Among Friday’s highlights:
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume was a heavy 309.35 million shares.
Like the Dow, broad market indexes closed lower.
* GM fell 1 3/4 to 41 3/8 in very heavy trading after tumbling 3 3/4 on Thursday.
* Silicon Graphics jumped 2 3/4 to 29 after posting earnings that beat analysts’ forecasts.
* Community Psychiatric Centers lost 3 to 9 1/2 after saying its fourth-quarter results will not meet analysts’ expectations.
* Summit Technology rose 2 3/8 to 34 7/8 on news that an advisory panel to the FDA had recommended approval of the company’s excimer laser for treatment of nearsightedness.
Dollar Takes a Plunge
The dollar has plunged against the German mark for most of the year. The dollar in marks, weekly closes since June:
Friday: 1.4995
Source: TradeLine
