Economic Fears Gang Up on Dow and Dollar
The dollar joined the global devaluation movement Thursday, plunging against the Japanese yen and setting a 10-month low against the German mark amid heavy trading by global hedge funds and concern about the potential for a sharp slowdown in the U.S. economy.
The stock market also took its cue from economy fears, as the Dow Jones industrial average slid 100.15 points, or 1.3%, to 7,682.22, led by another steep sell-off in banks and other financial stocks.
Meanwhile, gold prices jumped as the dollar fell, though analysts said gold’s gain may reflect “short covering” by bleeding hedge funds seeking to lock in some profits.
The dollar was the big story, slumping 2.80 yen to 134.70 in New York. The dollar slid further in Tokyo early today, to 133.55 yen--its lowest since mid-May.
While just a few weeks ago analysts were concerned about the dollar’s strength as it reached 148 yen, the greenback has suddenly shifted into reverse.
Part of the dollar’s weakness is explained by technical trading by global investment hedge funds: Many of those funds had borrowed in yen, at low rates, to invest elsewhere, and they are now repaying those loans to close out their positions.
“Investors are unwinding a lot of positions. There are a lot of losses in Russia, and those losses have to be covered somehow”--namely, by selling dollars to buy yen, said Fernando Medina, senior currency trader at Banco Atlantico.
Japanese officials, sensing a chance to strengthen their beleaguered currency, early today warned traders that they might step in to bolster the yen further.
But the dollar’s slide against the German mark, to 1.729 marks from 1.749 on Wednesday, had more to do with rising expectations that the Federal Reserve will cut U.S. interest rates sooner than later to help the economy, analysts said.
Lower U.S. rates would make U.S. bonds less attractive relative to European bonds, potentially leading to a weaker dollar.
San Francisco Federal Reserve President Robert Parry may have fueled new rate cut hopes by saying that spending by U.S. consumers and businesses will probably slow because of falling stock prices.
With more bad news out of Latin America on Thursday as markets there slumped, head winds from troubled global economies “must be taken seriously,” Parry said in a speech in Boise, Idaho.
On Wall Street, fresh worries about the economy pummeled financial stocks. Many of those leading firms have been reporting losses on Russian debt and other emerging-market trading.
The Russian ruble continued to plunge, falling to 13.5 to the dollar from 10.8 on Wednesday. That helped knock many European stock markets lower. The German market slid 3.2%. The French market lost 2.2%.
U.S. brokerage Lehman Bros. led financial stocks lower, falling $3.75 to $38.38 after warning of weaker near-term earnings because of emerging-market trading.
In the broad market, the Nasdaq composite index lost 20.99 points, or 1.3%, to 1,571.86. The Standard & Poor’s 500 lost 0.8%.
Losers topped winners 2 to 1 on the Big Board in heavy trading. The Dow plunged 512 points on Monday, rebounded 288 points on Tuesday and slid 45 points on Wednesday.
On Thursday, the Dow was off 204 points late in the day before recovering about half that loss.
“There’s not a whole lot of good things that are going to happen in the near term,” said Chuck Soderstrom, managing director of U.S. equity trading for J.P. Morgan Securities. “People are starting to gear up for a rough six months.”
Indeed, many analysts worry that a weakened outlook for corporate earnings could mean stocks will fall further in coming weeks, testing the Dow’s recent intraday low point of 7,400.
Economy worries again encouraged “safe haven” buying of Treasury securities Thursday. The 30-year T-bond’s yield dipped to 5.30% from 5.33% on Wednesday.
Still, the Japanese yen’s new strength could be a blessing, some analysts say. Just a month ago the fear was a weaker yen would force a fresh round of devaluations in East Asia, as smaller countries struggled to stay competitive with Japan.
A falling currency means a country’s exports get cheaper.
If the yen strengthens it could take pressure off other Asian currencies, in turn giving foreigners more faith that they could invest in those countries without the risk of another wave of devaluations destroying their investments.
In commodities trading Thursday, oil prices leaped more than 7% on expectations that supply problems in Nigeria and Russia will help erode a global oil glut.
Royal Dutch/Shell Group said civil unrest and a leaking pipeline forced it to halt exports of about 800,000 barrels a day from Nigeria, Africa’s largest producer.
Crude oil for October delivery rose $1 to $14.67 a barrel on the New York Mercantile Exchange.
Near-term gold futures rose $4.90 to $285.20 an ounce in New York. Analysts said some hedge funds covered “short sales”--bets that gold would continue to slide--by buying gold in the market.
In a short sale, a trader borrows and sells a security or commodity, expecting to repay the loan later at cheaper prices. “Short covering” means closing out the loan.
Among Thursday’s highlights:
* Slumping financial stocks included American Express, down $6.50 to $77.25; Merrill Lynch, down $3.94 to $63.88; and Citicorp, off $10.25 to $98.50.
* Many industrial issues were weak. GM fell $1.88 to $57.19, GE lost $2.63 to $77.75 and AlliedSignal slid $1.31 to $33.
* Tech stocks were mostly lower, led by Dell, down $2.19 to $108.06, and FileNet, down $2.38 to $15. But Intel gained $1.88 to $76.75 after a Morgan Stanley analyst raised his 1998 earnings estimate to $3.15 a share from $3.
* Drug stocks were strong. Merck rose $3.50 to $123.50; Bristol-Myers gained $3.19 to $106.75.
* Gold-mining stocks gained. ASA surged $1.56 to $17.25. Newmont Gold rocketed $2.56 to $18.31.
In Malaysia, meanwhile, the stock market zoomed 6.3%, as local investors jumped into the market after the government said it would restrict foreign capital movements with currency controls.
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Market Roundup, D14
