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High Trade Deficit Depresses Markets

October 14, 1987

NEW YORK (AP) _ The dollar and stock prices fell sharply and a key interest rate broke into double digits for the first time in two years today after the government announced a higher-than-expected $15.7 billion trade deficit for August.

The Dow Jones average of 30 industrial stocks fell 74.09 points to 2,434.07 by 2:30 p.m. EDT on the New York Stock Exchange, reaching its lowest level since July.

The dollar slipped to 142.50 Japanese yen by 2:15 p.m. EDT from its opening of 144.10 and to 1.8060 West German marks from its opening of 1.8225. The British pound rose to $1.6575 from its opening of $1.6445.

The yield on the benchmark 30-year Treasury bond jumped to 10.10 percent by 2:15 p.m. EDT, surpassing the 10 percent mark for the first time since Nov. 20, 1985. The yield was at 9.90 percent late Tuesday.

″The (trade) figures were still bloody bad. Where does it all stop? They keep saying they’re going to get better but they haven’t yet, have they?″ said Stephen Dakin, foreign exchange trading manager for Union Bank of Switzerland in New York.

Traders said they dumped dollars out of fear that the U.S. currency needs to decline in value in order to lower the prices of U.S. goods on the world market and shrink the persistent trade gap.

Stock and bond prices fell in a mirror action to the dollar’s fall. Foreign investors who underwrite the U.S. trade gap demand higher yields on their investments to make up for the prospect that their holdings will lose value from a decline in the dollar.

Fears that central banks would step in to thwart a sharp decline in the dollar probably kept traders from trying to bid it even lower, Dakin said.

Most economists and traders had predicted the deficit would shrink to somewhere between $14 billion and $15.5 billion in August from its record high of $16.5 billion in July.

But the long-awaited increase in exports failed to materialize. Exports actually fell 3.7 percent, to their lowest level since February, nearly matching a 4.2 percent drop in imports.

Central banks could try to halt a slide in the dollar by buying massive quantities of dollars in the open market or by manipulating interest rates to keep dollar-denominated securities more attractive, said Francoise Soares- Kemp, vice president of treasury for Credit Suisse in New York.

″They’re holding that over our heads,″ she said.

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