The U.S. dollar dropped to record lows throughout the world Monday, provoking fears of continued financial instability and prompting an unusual White House statement in support of the beleaguered currency.
Anxious about the greenback's plummeting market value, central banks from the United States, Japan, West Germany, Italy and Switzerland bought hundreds of millions of dollars on currency markets.
"The United States wants to see stability in the dollar," White House spokesman Marlin Fitzwater told reporters traveling with President Reagan in Los Angeles. "We feel strongly that any further decline or excessive fluctuation could be counter-productive."
The dollar's troubles cast a pall over the stock and bond markets, with the Dow Jones Industrial Average dropping 56.70 points and bonds declining as well. Later in the day, as currency traders learned of the White House statement and central bank purchases, the dollar rallied modestly, but not enough to prevent it from finishing at record lows against the Japanese yen and West German mark.
The dollar closed Monday at 123.55 yen and 1.599 marks in New York trading, its worst levels since World War II, continuing a downhill slide that began in early 1985.
"The mood of the market is bearish," said Kemp L. Mitchell, managing director of foreign exchange at Security Pacific National Bank in Los Angeles. "The sentiment is that we'll see the dollar lower."
The gloomy outlook follows an attempt last week by the United States and six major trading partners to stabilize the dollar by releasing a statement that suggested they would coordinate policies to prevent it from falling further. But the so-called "telephone accord"--the countries did not actually convene--may have had the opposite effect because it did not specify any new policy commitments to protect the dollar, analysts said.
"The market reaction is that the emperor has no clothes," said William C. Dudley, an economist with the New York investment banking firm of Goldman, Sachs & Co. "There are no fundamental policy shifts to back up what's on paper."
Measures to strengthen the dollar could include greater progress toward reducing the U.S. budget deficit, as well as more growth-oriented policies in West Germany and other nations that buy U.S. goods. In addition, higher U.S. interest rates could boost the dollar by making investment in U.S. securities more attractive--although higher rates run the risk of hurting the economy.
Expectations that the dollar has yet to hit bottom were manifest in Asian trading even as the U.S. financial community took its Christmas break last week. On Christmas Day, the dollar plummeted in Tokyo and continued sinking in other foreign countries over the weekend as Japanese companies flooded the light holiday market with dollars.
According to Michael G. Papaioannou, a foreign exchange analyst, this "dumping" by Japanese automobile, electronics and other companies sent the currency into a tailspin. "When they feel the currency is going to depreciate, they get rid of it," said Papaioannou, with the WEFA Group, an economic consulting firm, in Bala-Cynwyd, Pa. "That's what they did today."
Weak Dollars Aids Exports
The weaker dollar has boosted U.S. competitiveness by giving cost advantages to American manufacturers, and that has raised U.S. exports. That is the reason Reagan Administration officials approved of the dollar's fall, which began almost three years ago.
At the same time, however, American consumers have continued to buy vast quantities of imports, even at rising prices. The result is that the U.S. trade deficit may reach $170 billion this year, a key to global pessimism on the dollar and a frustrating Catch 22 for policy makers.
A falling dollar can cause inflation by forcing up the prices of imports, which has the unintended effect of enabling U.S. producers to hike the prices they charge American consumers. Further, it raises the specter of a large-scale abandonment of U.S. investment by foreigners. Foreign purchases of Treasury bonds have become increasingly important as a way to finance the huge U.S. debt.
No Commitment on Interest
But, if Monday's White House statement in support of the dollar seemed clear, the Administration's commitment to defending the currency at its current level remained something of a mystery. Last week, for example, Beryl W. Sprinkel, chairman of President Reagan's Council of Economic Advisers, said the currency accord by the seven major industrial nations included no commitment by the Federal Reserve Board to raise U.S. interest rates.