Financial anxiety leaped from the stock market to the currency markets Wednesday, as the dollar traded at its lowest point in years against several foreign currencies despite the intervention of the Federal Reserve and other central banks.
The immediate catalyst for the dollar's plunge was a remark by Jacques Delors, president of the European Community Commission, who reportedly said that the United States is willing to let the dollar slump significantly further against the West German mark.
More broadly, the slide reflected a growing impatience with economic problems in the United States and the ability of U.S. leaders to solve them, currency traders and financial analysts said.
"Everybody is making a big deal out of every small statement," said C. L. Cu, a vice president with Union Bank of Switzerland in Los Angeles. "The psychology is bearish, and everybody is looking for reasons to sell the dollar."
As word of Delors' comments spread on news wires, the dollar began plunging, hitting a seven-year low of 1.7310 marks in New York. The stock market, meanwhile, ended the day mixed, with the widely watched Dow Jones Industrial Average edging up only 0.33 points to close at 1,846.82. Broader measures of stock market activity showed losses. (Details in Business.)
As financial worries continued to seize markets throughout the world, gold prices rose sharply, closing in London at $477.50, up $3.50.
Treasury Department officials swiftly denied Delors' comments--and European officials issued a clarification--actions that seemed to stabilize the dollar late in the day. Although the dollar bounced back a bit to close at 1.7380 marks in New York, it was well below Tuesday's close of 1.7575.
When the stock market began its precipitous drop earlier this month, the dollar initially held up well, as many investors sought refuge in U.S. Treasury securities, according to analysts. In addition, there is evidence that a sell-off of foreign stocks by Americans at the time initially kept up demand for the dollar and, therefore, its value.
But the plunging stock market has ominous implications for the greenback, as Wednesday's trading seemed to confirm. It has raised fears of a U.S. recession, hurting demand for the currency. In addition, foreign investors--who have lost money in stock markets throughout the world--could be forced to sell off some of their American holdings.
The U.S. economy remains so influential, however, with so many transactions conducted in dollars, that a wholesale retreat from the currency is doubtful, said Carlos Castellanos, a vice president with Geoffrey Bell & Co., financial consultants in New York. "The stock market can lead the dollar . . . down further, and the dollar can make the stock market go down further," he said. "But, in the end, the money can't vanish."
Despite reported dollar purchases during the last two days by central banks of the United States, Germany, Japan, England and other nations, many traders doubted the banks' commitment to supporting the dollar at its recent levels, a doubt that Delors' comment seemed to exploit.
There are questions as to whether the United States and its major trading partners are tacitly seeking a lower dollar. "I've heard that today from two central banks in South America, a central bank in Singapore and clients in Europe," Castellanos said.
The controversy set off by Delors' statements has its roots in a meeting in Paris last February. At the time, officials of the seven major industrial democracies agreed to support the dollar within an undisclosed range relative to their own currencies. The Reagan Administration has looked at the lower-valued dollar--it peaked in early 1985--as a way to improve the U.S. trade deficit by making American goods more cost-competitive.
Delors said the Louvre Accord had spelled out that the dollar should not sink below 1.80 West German marks. After noting that the dollar is trading below 1.75 marks, Delors added: "Let's not have any illusions. The Americans are prepared to let it fall to 1.60."
U.S. Treasury Department officials said Delors' comments "do not reflect the policies of the United States government."
A European Community Commission spokesman in Washington said that Delors' remarks were misinterpreted.
Roughly translated from French in a European Community transcript, Delors said: "Let's not have any illusions. We can see what the consequences would be for the budget of (the European Community) . . . . If the dollar were to be set at 1.6 instead of 1.8, this could mean 1.2 billion ecus (units of European Community currency) of higher agricultural expenditures."
The dollar fell to 138.45 Japanese yen from 140.85 in New York, marking the first time it has traded below 140 since April. In Tokyo today, the dollar stood at 138.10 yen at mid-morning, down from 140.75 yen Wednesday. The British pound closed at a five-year high of $1.7240, from Tuesday's close of $1.7040.
In European trading, which starts almost five hours ahead of the New York opening, the dollar Wednesday tumbled as low as 1.7520 marks and 140.05 Japanese yen. After the central bank buying, it steadied at just under 1.76 marks and just over 140 yen.
Tom Redburn and Oswald L. Johnston in Washington contributed to this story.