Dollar Surges, Gold Slumps; Stocks Mixed
The dollar jumped to near two-year highs against key European currencies Monday, as traders bet that the solid U.S. economy--and soaring U.S. stock and bond markets--will draw more foreign investment in 1997.
Meanwhile, gold futures prices slumped below $370 an ounce, an important support level.
On Wall Street, stocks finished mixed as early profit taking in the Dow Jones industrials gave way to heavier buying later in the day. Retail and technology shares were in strong demand.
The Dow ended unchanged from Friday, at 6,521.70. But indexes of smaller stocks continued to gain, as the market’s rally showed more signs of broadening.
The big news of the day was the dollar: In New York trading, the buck soared to 1.555 German marks, up from 1.539 marks on Friday and a 22-month high.
The dollar also rallied to 22- or 23-month highs against the Swiss franc and French franc, and closed at 114.55 Japanese yen, up from 113.87 on Friday and nearing the 42-month high set in October.
Two forces drove the dollar, traders said. First, fresh U.S. economic data Monday, including a national report on manufacturing activity and anecdotal reports on weekend retail sales, suggested that the economy remains healthy, especially relative to the European and Japanese economies.
Second, Otmar Issing, chief economist of the German central bank, the Bundesbank, told a bankers forum in Germany on Monday that one of the possible effects of the approach of Europe’s single currency union might be a shift out of the German mark and into dollar-denominated investments, as nervous traders and investors look for a safe haven.
Moreover, the strict fiscal-spending limits that many European economies must follow to reach currency union in 1999 could continue to dampen growth in Europe, making U.S. growth--and, potentially, U.S. interest rates--all the more attractive.
On Saturday, Bundesbank President Hans Tietmeyer had said in an interview in the German weekly Der Spiegel that he “would have no objections to a somewhat stronger dollar.”
A stronger dollar makes European exports to America less expensive, thereby helping European companies. For U.S. companies, meanwhile, the rising dollar makes it tougher to do business overseas.
But one other side effect of a healthier buck is that it attracts more foreign investment to the United States, because foreigners’ assets here automatically appreciate as the dollar does.
That could help draw more foreign funds into U.S. stocks and bonds in the months ahead, analysts say.
Foreigners might have helped bonds Monday: Yields initially rose on the economic news, but closed only modestly higher. The bellwether 30-year Treasury bond yield ended at 6.36%, up from a nine-month low of 6.35% on Friday.
“Initially, we thought the numbers ought to have been bad” for bonds, said Lyle Fitterer, who manages $1.5 billion in bonds at Strong Capital Management in Milwaukee. “But continuing strength in the dollar” buoyed bonds by reinforcing expectations that investors outside the U.S. would keep buying Treasuries.
One casualty of the stronger dollar, and continued bullishness toward stocks and bonds: Gold sank below the $370 mark, with December futures tumbling $4.10 to $368.90 an ounce on the Commodity Exchange in New York, lowest since October 1993.
With inflation still under control and financial assets booming, more investors are finding no good reason to hold gold.
On Wall Street, meanwhile, the Dow index recovered from a 49-point morning decline to close flat Monday. It was overshadowed by indexes of small and mid-sized stocks, which have been climbing faster than the blue-chip Dow over the last week, after weeks of taking a back seat to the best-known index.
The Russell 2,000 index of smaller issues rose 1.23 points to 355.34 on Monday, even though losers topped winners by 22 to 19 on Nasdaq. The Nasdaq composite index, heavily weighted with tech issues, gained 7.21 points to a record 1,299.82, its sixth straight new high.
“This is the time to pile into small companies, and we are seeing signs of that,” said Dirk Van Dijk, an equity strategist at C.H. Dean & Associates with $4 billion in assets.
Among Monday’s highlights:
* Tech stocks surged anew, led by IBM, up 3 5/8 to 163, a nine-year high. Other big gainers included Digital Equipment, up 3 1/2 to 40 1/8; Western Digital, up 4 7/8 to 58 5/8; Dell, up 3 1/4 to 104 7/8; Apple, up 1 to 25 1/8; and Adobe Systems, up 3 7/8 to 43 3/8.
Informix rose 2 5/8 to 26 3/8 in heavy trading after the developer of database management software unveiled new server software to better manage data.
Also, America Online surged 4 5/8 to 39 7/8. The company said it is embarking on a major expansion program. There were also vague takeover rumors in the market.
* Retail stocks gained after cash registers were extremely busy at the nation’s stores over the long Thanksgiving weekend.
Sears rose 1 1/2 to 51 1/4, Federated Department Stores jumped 1 5/8 to 35 3/4, Mercantile Stores rose 1 1/4 to 51 1/2, Gadzooks surged 2 1/2 to 31, TJX leaped 1 3/8 to 46 1/2 and Gap was up 1 1/4 to 33 3/8.
* Smaller stocks moving higher included Tarrant Apparel, up 7/8 to 14 5/8; Encad, up 1 1/8 to 38 5/8; and Oakley, up 1 to 14 7/8.
* On the downside, bank stocks weakened as bond yields perked up. BankAmerica lost 1 to 101 3/4 and Citicorp eased 3/4 to 108 1/2.
* Quaker Oats fell 1 5/8 to 37 3/4 as speculation waned about the food and beverage company selling its Snapple division.
