Dollar hits a low vs. mark 4 Decline sends bonds and stocks into steep drop

August 22, 1992|By New York Times News Service

NEW YORK -- The dollar, plagued by a weak economy and more attractive interest rates abroad, plunged to all-time lows against the German mark yesterday. The decline dragged down the U.S. bond and stock markets and raised fears of economic disruptions both in the United States and Europe.

The Dow Jones industrial average fell 1.5 percent, or 50.79 points, to close at 3,254.10, while the bond market gave up gains it had made in the last two weeks. The sharp fall in the markets is an unwelcome development for President Bush, who in his acceptance speech Thursday night asked voters to trust him as the better steward of the nation's economy.

Initially, traders appeared to be granting the president his wish, as stocks and bonds rose, but those rallies were turned into routs.

"The whole downdraft in stocks and bonds is off the dollar," said Joseph Liro, a financial economist at S.G. Warburg & Co. in New York. "The central banks came in, rattled their swords, and they scared nobody."

If the dollar's slide cannot be contained, confidence in the American economy could be damaged, and investors could push up long-term interest rates, threatening an already fragile economic recovery.

The dollar's fall, analysts said, could also intensify the tensions in the European Community, where the mark is the dominant currency, forcing even higher interest rates there and threatening the chances for a smooth transition to a unified Europe.

The Federal Reserve, 14 European central banks and the Bank of Canada bought dollars repeatedly in the foreign exchange market yesterday in an unsuccessful effort to support the sinking currency. By the end of the day, the dollar had fallen more than 1 percent against the mark.

Analysts are anxious about the outlook both here and in Europe because there is no simple way to halt a further decline in the dollar.

Higher interest rates would support the dollar by attracting more foreign investment, but the Federal Reserve cannot raise short-term interest rates without strangling an economic recovery that is already nearly lifeless. Still, the mere possibility of higher rates upset the stock and bond markets.

Conversely, a cut in European rates would narrow the differential of more than 6 percentage points that now favors the mark and other European currencies over the dollar. But such rate cuts are unlikely because the Germans, who set the European economic tone, have insisted on higher rates to fight inflation after the unification of the two Germanys.

This leaves international economic cooperation, which is supposed to ease the transition through difficult economic times, in gridlock. Intervention in the foreign exchange markets by central banks is the only tool left to support the dollar. But it might not be effective alone, if traders are betting that the United States and its economic allies will not take more powerful economic steps to support the foundering currency.

In late trading in New York, the dollar was at 1.4295 against the mark, 1 percent below the previous record closing low in New York of 1.4470, which it reached Thursday. The dollar also easily pierced the 1.4430 level, the lowest level reached in intraday trading since the mark was created in 1948. The dollar also fell sharply against the pound, the Swiss franc, the French franc, the yen and other major currencies.

John Lipsky, the chief economist at Salomon Brothers, said one reason the intervention was not very effective was that the amount of dollar buying was not large. And, he added, the mildness of the intervention effort might signal that the United States and its allies did not care if the dollar declined further, so long as the fall is slow and orderly.

In the bond market, the failure of the intervention wiped out a rally that came in part on relief that Mr. Bush emphasized the need to reduce federal spending and the budget deficits.

It had pushed up the price on the Treasury's 30-year bond and reduced yields to levels not seen since the summer of 1986. But in late trading the price of the 30-year bond was down almost half a point, or $4 for a $1,000 face value, and the yield had jumped to 7.35 percent from 7.26 percent earlier in the day.

The dollar has been falling since the spring for two main reasons: the lack of a strong economic recovery here and the wide difference in interest rates available to investors here and in Europe. A strong economic recovery in the United States would have attracted foreign investment and, therefore, dollar buying.

In addition, interest rates in Europe are three times higher than in America. This makes it very costly to hold dollars instead of marks or other European currencies.

Analysts said the dollar intervention effort had two purposes. One goal was to keep the dollar's decline, which has been persistent but slow recently, from shifting into high gear. Such a fall could panic investors by shaking confidence in the outlook for the U.S. economy.

The second goal is to weaken the German mark and reduce the tension that is threatening harmony within the European Monetary System.

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