Buying Spree Boosts Dollar to 6-Month High : Currency: U.S., Germany and Japan join forces to fuel greenback’s rise, but the gains hurt U.S. multinational stocks.
The dollar zoomed to its highest level in six months early today in Tokyo, keying off strong gains in New York that were fueled by unexpected buying by major world central banks.
Currency traders said they expect further advances as the dollar now looks to have decisively broken a five-year downward trend against the Japanese yen.
“Buy dollars and wear diamonds,” joked Scott Pardee, senior adviser at broker Yamaichi International in New York.
In Tokyo early today, the dollar briefly topped 99 yen and was trading at 98.24 yen at midday. That followed the dollar’s surge in New York on Tuesday to 96.94 yen, up sharply from 93.65 on Monday and the highest level since Feb. 28.
The Tokyo stock market, buoyed by expectations that the weaker yen will bolster profitability of battered Japanese exporters, rocketed early today. The Nikkei-225 index was up 717.54 points, or 4.1%, to 18,170.26 at midday, after leaping 536.15 points on Tuesday.
But in New York on Tuesday, the dollar’s strength had the opposite effect on U.S. blue-chip stocks because it threatens to erode their overseas earnings. The Dow industrial average lost 19.02 points to 4,640.84.
Nonetheless, the world’s major central banks sent a clear signal Tuesday that they want the dollar’s recent rebound to continue.
In carefully coordinated intervention, which currency traders estimated cost between $1 billion and $2 billion, central banks roared into the market to snap up dollars.
Besides pushing the dollar higher against the yen, the buying powered the dollar to 1.478 German marks in New York, up from 1.434 on Monday. The dollar also jumped against most other key currencies.
Traders said the U.S. Federal Reserve, the Bank of Japan and the central bank of Switzerland all participated in the buying spree. The big surprise was that the German Bundesbank was also involved, analysts said.
“The most important part of this intervention was not the size or how many times they went into the market,” said Jack Griffin, vice president at Fuji Bank Ltd. in New York. “It was the method. . . . They were able to execute the intervention and get the dollar up to levels we haven’t seen in months.”
“The trend has turned,” said David Coleman, economist at broker CIBC Wood Gundy in London. “Dollar-yen is going back up to 100.”
That would restore the U.S. currency to about where it started the year, before a headlong plunge that saw it sink as low 79.75 yen in mid-April on pessimism about the huge U.S. trade deficit.
The dollar has risen in fits and starts since then due to a number of factors: joint buying by major central banks, interest rate cuts in Germany and Japan, cooling trade tensions between Tokyo and Washington, and Japanese government incentives to get investors there to invest more abroad.
As to why the world’s major governments would agree that the dollar should rise, economists speculated that the United States, whose major companies could be mildly hurt by the stronger dollar, may have decided it has more to lose if the already weakened Japanese and German economies were to be further slammed by a weak U.S. currency.
In theory, at least, a stronger dollar could speed economic growth in Japan and Germany by restoring competitiveness to many companies in those countries. Better growth overseas would ultimately be a benefit to the U.S. economy, experts say.
Indeed, the U.S. stock market’s decline was relatively muted Tuesday, given the extent of the dollar’s advance.
The Dow recovered from a loss of more than 40 points early in the day. And by the close of trading on the NYSE, losers edged winners by just 12 to 10.
In the broad market, the Russell 2,000 index of smaller stocks continued to rise despite the Dow’s weakness. The Russell gained 0.40 point to a record 300.67.
Stocks were helped by a rally in the bond market. Yields had surged early in the day after Fed Vice Chairman Alan Blinder suggested no more Fed interest rate cuts may be forthcoming.
But a weak retail sales report late in the day brought buyers back to bonds. The 30-year Treasury bond yield, which closed at 6.95% on Monday, fell to 6.89% after reaching 6.99% early in the day.
Among the market highlights:
* Blue-chip multinational stocks hurt by the dollar’s climb included Coca-Cola, off 7/8 to 65 1/2; McDonald’s, down 1 1/8 to 37 3/4, and Merck, which fell 7/8 to 50.
* Technology shares were mixed after rallying again Monday. Intel fell 7/8 to 65 1/2 and Hewlett-Packard lost 1 to 77 7/8, but Compaq jumped 1 1/8 to 54 1/8, Sun Microsystems surged 1 3/8 to 53 7/8 and IBM added 1 1/4 to 112, a new 1995 high.
* Rail stocks gained on new takeover rumors. Conrail jumped 1 7/8 to 65 3/8, CSX added 1 7/8 to 84 1/4 and Burlington Northern gained 1 to 70 1/8.
* The initial public offering of AVX soared 5 3/8 from its starting price of 25 1/2, to close at 30 7/8. AVX is A unit of Kyocera and makes passive electronics components.
Overseas, Frankfurt shares ended higher, supported by the dollar’s strength. The DAX index ended up 19.16 points at 2,227.61.
In the U.S. municipal bond market, the City of Los Angeles sold $230 million in general-obligation bonds at an overall tax-free interest cost of 5.66%, which city officials said was within expectations.
The bonds were privately insured, but the city said the insurance cost was more than recouped by the lower interest rates the city was afforded because of the insurance. A syndicate led by Bank of America made the winning bid for the bonds.
Markets Roundup, D8
