Dollar Plunges Again, Setting Off Stock Selloff
The U.S. dollar continued its extraordinary slide Tuesday, plunging to record lows against the German mark and Japanese yen, as currency worries slammed the stock market and eroded the greenback’s once-lofty status throughout the world.
For the second straight day, U.S. government officials chose not to resist the anti-dollar mania, fueling speculation that the currency could hurtle even lower in the coming days.
And unlike recent dollar-selling stampedes, high-rolling speculators were joined Tuesday by corporations, banks and mutual funds in the selloff, traders said.
“Right now it’s a panic situation--we’re in uncharted territory,” declared Frank Conte, a currency dealer at Royal Bank of Canada in New York. “There’s no sign from the Federal Reserve. There’s no talk from the Administration. So traders are wondering: ‘Where’s the bottom for the dollar?’ ”
Such questions spread to the stock market, where stocks suffered their steepest fall in seven weeks, amid fears that the dollar’s woes could lead to higher interest rates. The Dow Jones industrial average dropped 34.93 points to close at 3,962.63.
While many analysts doubt the Federal Reserve Board would hike interest rates to shore up the U.S. currency, such a move is among the government’s slim arsenal of weapons to stabilize the dollar.
The punishing treatment of America’s long-trusted currency, combined with investors’ decided preference for German marks and Japanese yen Tuesday, startled veteran traders who wondered aloud how the episode would unfold.
“It’s pandemonium, isn’t it?” said Robert A. White, senior vice president at Standard Chartered Bank in New York. “It’s shocking to a lot of us old-timers in the market to see the dollar ostensibly removed as the reserve currency of the world.”
The dollar hasn’t suffered alone. In what has become a massive, global shuffling of money, currencies of Canada, Mexico, Italy, Sweden, Belgium and other nations have all been walloped. Germany’s surging mark, meanwhile, has reached post-World War II highs against the British pound, French franc, Spanish peseta, Portuguese escudo and Swedish krona.
In New York trading Tuesday, the dollar closed at 1.3702 marks, down from 1.4048 late Monday. It closed at 90.05 yen after falling as low as 89.05, down sharply from 92.80, the previous post-World War II low.
In trading in Tokyo today, the dollar continued to plunge, trading at 88.95 yen and 1.35 marks. Most Asian stock markets also were down, as the weak dollar threatens to raise the cost of Asian exports to the United States.
The buck has slipped 6% against the mark and yen this month alone, compared to an 11% loss against both currencies for all of last year.
“What can we do to stabilize the dollar or cause it to go up without doing long-term economic damage?” asked Monica Williams, vice president and foreign exchange manager at Sanwa Bank California.
While that answer seemed elusive Tuesday, economists cited several reasons for the problem that has erupted in recent days. German interest rates are expected to rise this year, benefiting lenders. By contrast, Fed Chairman Alan Greenspan recently hinted that U.S. rates were at or near their peak levels.
The prospect of a “soft landing” for the U.S. economy--slower growth but no recession--suggests that U.S. consumers will continue to gobble up imports, keeping the nation’s trade balance deep in the red this year.
What is more, highly visible news from Washington seems to have convinced speculators that the dollar is a less attractive haven than in the past. Traders have repeatedly mentioned the rescue plan for Mexico and the defeat of the balanced-budget amendment in Congress in recent days as reasons to abandon the dollar.
“There’s a complete lack of faith in the Fed, the Administration and in Congress to get the budget in order, to get the trade balance in order,” White contended.
The controversy spread on Capitol Hill Tuesday, as members of Congress worried about the dollar and also complained about the rescue plan for Mexico, entailing $20 billion of U.S. loans and loan guarantees for the peso.
“It appears that the currency speculators, the vultures of the world, are beginning to circle around the U.S. currency because they seem to sense that our currency is vulnerable,” Rep. Dana Rohrabacher (R-Huntington Beach) said during a hearing of the House International Relations Committee.
At the hearing, Treasury Undersecretary Lawrence Summers declined to comment on the dollar, citing White House policy. However, he did repeat last week’s statement by Treasury Secretary Robert E. Rubin that a strong dollar “is in our national interest.”
For all the financial gyrations it may spark, a lower dollar has extremely varied effects on the business world, creating beneficiaries as well as losers.
U.S. exporters of a range of products, including grain, pharmaceuticals and machinery, tend to gain cost advantages against foreign rivals. But U.S. importers--and consumers of products from strong-currency countries--may have to pay more. The weak dollar makes it cheaper for Japanese auto makers to build U.S. factories, but it may drive up the U.S. cost of autos built overseas.
A new worry is that large institutions may be caught with large, speculative holdings of dollars or dollar-based derivatives that could produce huge, destabilizing losses. Derivatives are financial instruments, such as futures and options, whose value is dependent on underlying markets in currencies, commodities, stocks or bonds.
If U.S. officials feel compelled to stabilize the dollar, boosting interest rates to make dollar holdings more attractive is an available step, at least in theory. But such a move would jeopardize an already slowing national recovery, and the Fed is believed unlikely to hike rates for the dollar alone.
A more conventional step would be for the Fed, possibly in tandem with other central banks, to intervene in the currency market, through large-scale dollar purchases. Such moves have mixed results, however.
Times staff writer Michael A. Hiltzik contributed to this story.
* IMPACT WIDESPREAD: The dollar’s steep drop upends tourist budgets and confounds business executives. D1
