Los Angeles Times: Falling Dollar Rattles Investors; Stocks Slide

The buck responds to world financial leaders signal of a devaluation. The Dow loses 109 points; gold jumps.

By Tom Petruno

Times Staff Writer

September 23,2003

The dollar plunged against other currencies Monday, pulling stock and bond prices down with it, after world financial leaders strongly signaled that they would tolerate a weaker U.S. currency.

The day's action suggested that investors were taking seriously the potential for a major shift in currency values that could stem job losses in the U.S. manufacturing sector by boosting exports, analysts said.

But the markets' moves also pointed up the risks faced by the Bush administration as it pursues a weaker-dollar policy: Though a devaluation could make U.S. products less expensive for foreign buyers — and foreign goods pricier for American buyers — it also could make overseas investors reluctant to buy U.S. stocks and bonds.

That poses a threat because of the federal government's massive borrowing needs, with the budget deficit at record highs.

Investors'jitters were evident as the stock market posted a broad decline Monday: The Dow Jones industrials slid 109.41 points, or 1.1, to 9,535.41, while the Nasdaq composite index slid 31.08 points, or

1.6, to 1,874.62.

The dollar's plunge was the main topic of conversation on Wall Street. The buck sank to 111.96 yen in New

York, down 2 from 114.29 on Friday and the lowest level in nearly three years.

The dollar also lost ground against a host of other currencies, including the Swiss franc, the Australian dollar, the South Korean won and the euro. The European currency jumped to $1.148, up from $1.137 on

Friday and the strongest it has been since late July.

Financial ministers of the Group of 7 leading industrial nations, meeting on Saturday in Dubai, United Arab

Emirates, issued a statement saying they agreed that "more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system."

Though the wording might appear to be typical finance-minister jargon, it was anything but, analysts said.

Rather, they said, it was a sign that the United States, represented at the meeting by Treasury Secretary John

W. Snow, had pushed its allies to allow their currencies to rise against the dollar, if that's what market forces dictate.

"What they want is a controlled devaluation of the dollar," said Jack Malvey, fixed-income strategist at brokerage Lehman Bros. in New York.

The United States, which is running a trade deficit that is totaling about $40 billion a month, sees a weaker dollar as a sure way to boost exports, said Jay Bryson, economist at Wachovia Corp. in Charlotte, N.C.

If the price of a U.S. product stays the same in dollars, while a foreign buyer's own currency is rising the product's cost for that buyer is declining.

For example, if a U.S. product is priced at $1 when that amount equals 120 yen, the cost to a Japanese buyer is 6.7 less if$l is worth 112 yen.

If a broad spectrum of American goods were to enjoy higher foreign sales because of a falling dollar, that could spark hiring in the struggling manufacturing sector, Bryson said. And job creation could be crucial to

President Bush's chances for reelection, he said.

"This is about 2004," Bryson said, referring to the election.

On Monday, Snow told reporters in Dubai, where the International Monetary Fund is holding its annual meeting, that there had been no change in the official U.S. policy favoring a "strong" dollar.

But his words appeared to fall on deaf ears in financial markets, where many analysts have long argued that the dollar was overvalued and ripe for a fall.

Indeed, some economists said Saturday's statement by the G-7 nations — Britain, Canada, France, Germany,

Italy, Japan and the United States — was reminiscent of the group's so-called Plaza Accord of 1985, which led to a sharp decline in the dollar's value.

"It's very significant," said Alien Sinai, head of Decision Economics Inc. in New York. What's more, the implications go beyond the United States' trade relationships with other G-7 countries, he said.

"This is part of a continuing drive to coax the Chinese to free up their currency," Sinai said.

China has faced rising criticism in the United States for holding its currency, the yuan, stable against the dollar, even though many analysts say China's economic strength argues that the yuan should rise in value.

So far, the Chinese government has refused to agree that the yuan should be revalued. A more robust yuan, compared with the dollar, could make Chinese products more expensive for consumers worldwide, slowing

China's exports and its economy.

The same fears about the fallout from a weaker dollar are troubling the United States' G-7 allies, economists say. Naturally, none of them wants to see their own export growth hurt.

The Bank of Japan has been selling billions of dollars worth of yen this year in the open market, trying to keep the currency from gaining too much ground against the dollar. The yen's strength has been fueled partly by increasing signs of recovery in the Japanese economy.

The dollar has dropped 17 against the yen since February 2002, when it was worth 135 yen.

Concern about the effect of a stronger yen on Japanese exporters helped send the Nikkei-225 stock index down 463.32 points, or 4.2, to 10,475.10 on Monday. It still is up 22 so far this year.

The dollar also has weakened against the euro this year. It took $1.05 to buy one euro at the start of the year, compared with nearly $ 1.15 on Monday.

European stocks were broadly lower Monday on concerns about European exports. The German market slid

3.4; the French market lost 2.7.

Meanwhile, a falling dollar poses risks to the United States too. It could boost inflation by driving up prices of imported products, though many experts say that is a minor issue with the U.S. inflation rate already so low.

A weaker dollar also could drive long-term bond yields higher if foreign investors — who have been big buyers of Treasury securities — decide to pare back on their purchases or sell their bonds.

A falling dollar devalues the U.S. assets held by foreigners. Thus, foreign investors might be inclined to shun U.S. securities rather than face the risk that anything they would buy would plunge in value.

On Monday, long-term Treasury bond yields rose, but yields pulled back from midday highs. The 10-year

T-note yield ended at 4.22, up from 4.16 on Friday but down from a midday peak of 4.31.

Shorter-term bond yields were flat or lower. The two-year T-note dipped to 1.64 from 1.67 on Friday.

As for the U.S. stock market, stronger export growth could be good for the shares of manufacturers, analysts noted. On Monday, however, investors seemed more inclined to take profits in stocks across the board, after hefty gains in recent weeks.

Industrial stocks that lost ground despite their status as potential beneficiaries of a lower dollar included

Caterpillar, down 72 cents to $70.47, and DuPont, down 99 cents to $41.27.

Falling stocks outnumbered rising issues by 24 to 9 on the New York Stock Exchange and by 21 to 11 on

Nasdaq, though trading volume was moderate.

"A weaker dollar traditionally has been a stimulant [for the economy], but it comes at a time when interest rates are vulnerable" to further increases, said Steven Wieting, economist at brokerage Smith Barney in New

York.

Still, there were modest gains in shares of some companies that are widely viewed as beneficiaries of a weaker dollar. Eastman Kodak, for example, added 15 cents to $27.95; 3M was up 14 cents to $142.12.

In commodities trading, gold won at the dollar's expense. The metal's price in New York futures trading jumped $5.40 to $387.20 an ounce, the highest in seven years.

As other currencies rise against the dollar, gold becomes less expensive in those currencies.

Gold mining stocks rallied with the metal. Newmont Mining rose 64 cents to $41.30; Goldcorp gained 32 cents to $14.14.