Dollar Hits New Low Against Yen Despite Heavy U.S. Buying
WASHINGTON (AP) _ The dollar hit another record low against the Japanese yen Monday as currency markets brushed aside a massive rescue effort mounted by the Clinton administration.
Currency traders estimated that the Federal Reserve, acting on orders from the administration, sold Japanese yen and German marks to purchase dollars in a sum estimated at $1.5 billion to $2 billion, possibly a record for Fed dollar purchases.
However, the administration’s intervention in currency markets did little more than halt a steep decline in the dollar. In late New York trading, the U.S. currency was still below its levels of last Friday against both the yen and the mark.
Treasury Secretary Robert Rubin confirmed that the United States was buying dollars in a statement issued early Monday morning in which he repeated past assurances that the administration was intent on defending the U.S. currency.
So far, the dollar’s troubles have not spilled over into other financial markets. On Monday, stocks were up slightly with the Dow Jones industrial average rising 10.72 to close at 4,168.41. Bond prices posted a strong gain, pushing the yield down to 7.38 percent for the benchmark 30-year Treasury bond.
Investors were encouraged by a report showing weakness in the manufacturing sector that bolstered their belief that the economy was slowing enough to keep inflation in check.
``We acted in the exchange markets overnight out of concern with recent movements in exchange rates,″ Rubin said in a brief statement. ``This administration believes a strong dollar is in America’s interests and we remain committed to strengthening the fundamentals that are ultimately important to maintaining a strong and stable currency.″
Rubin’s confirmation occurred after the United States through the Federal Reserve joined with the Bank of Japan to buy dollars during trading in Asia. Later with the greenback still under heavy downward pressure, the Fed acted alone to buy dollars during trading in New York.
Traders estimated the United States purchased at $1.5 billion to $2 billion. If the actual figure turns out to be at the high end of traders’ estimates, it would be a record, surpassing the $1.6 billion in dollar purchases by the Fed last Nov. 2. The United States last intervened in currency markets in early March.
Despite the aggressive dollar buying by the Fed, the greenback remained under heavy pressure. In late New York trading, $1 bought only 86.13 yen, up slightly from a record low touched earlier in the day of 86.00 yen but still below last Friday’s level of 88.55 yen. The dollar was also lower against the German mark.
Since the first of the year, the dollar has lost 13 percent of its value against the Japanese yen and 11 percent against the German mark.
Private economists predicted that the dollar’s weakness was likely to continue in spite of periodic dollar-buying intervention efforts by the United States and its allies.
``Intervention is like a Band-Aid,″ said Robert Brusca, an economist at Nikko Securities in New York. ``You can’t use a Band-Aid when you need major surgery.″
The dollar’s tumble on Monday occurred in spite of the fact that both Germany and Japan cut interest rates last week. Normally, reductions in rates overseas would be viewed as a plus for the dollar because it would increase the attractiveness of dollar-denominated investments for foreigners.
But last week’s rate cuts in Germany and Japan and Monday’s dollar purchases made little dent in traders’ pessimism about the dollar.
Analysts blamed the negative sentiments on a host of factors, including America’s huge and growing trade deficit, which must be financed by borrowing from abroad; the continued economic troubles in Mexico, which is America’s third biggest export market; and renewed trade frictions with Japan over autos.
``These problems are not going to turn around overnight and this realization has caused a flight to quality in harder currency assets such as the German mark, the Japanese yen and the Swiss franc,″ said Richard Berner, chief economist at Mellon Bank in Pittsburgh.
Critics have seized on the administration’s $20 billion rescue package for Mexico as a contributing problem because the Mexican resources are coming from the same $40 billion fund used to support the dollar.
Senate Republican leader Bob Dole of Kansas blamed the dollar’s troubles on ``terrible work by the Clinton administration.″ Dole did not elaborate, but he has sought to distance himself in recent weeks from the Mexican rescue effort.
Some analysts attributed recent dollar weakness to a growing belief in financial markets that the Federal Reserve is not going to push interest rates higher in the United States because of widespread signs that the U.S. economy is slowing from a torrid pace set last year.
Without an increase in interest rates in the United States, the unilateral moves by Germany and Japan are not enough to turn around market sentiment, analysts said.
``We will continue to walk a tightrope on the dollar with sporadic intervention and jawboning on the part of officials in the United States, Japan and Germany,″ predicted Allen Sinai, chief international economist at Lehman Brothers in New York. ``This situation is likely to continue until we get a turn in the fundamentals such as an improvement in the trade deficit.″