Dollar has biggest one-day fall against yen in 25 years.
Wednesday October 7 11:18 AM EDT
Battered Dollar Weighs On European Stocks
By Richard Baum
LONDON (Reuters) - The dollar suffered one of its most dramatic
beatings ever Wednesday, adding fuel to a slide in European
stocks, as a hardening view that U.S. interest rates will fall
faster than Germany's coincided with indications Japan will act
to stimulate its economy.
Significant progress on a bank recapitalization plan in Japan, a
rejection of German interest rate cuts by the Bundesbank
president and gloomy comments by the Federal Reserve chairman
gave European markets a day that was volatile even by recent
standards.
''Greenspan is saying some nasty things and the weaker dollar is
not good for our exporters,'' one Amsterdam share trader said.
The dollar fell nine percent to an eight-month low against the
Japanese currency and probed a 20-month trough against the mark.
The blow from the weaker dollar to Europe's exporters helped pull
European stocks into the red for the day.
The bourses had initially built Tuesday's surge in early trading
after Tokyo's Nikkei stock index soared more than six percent,
but then reversed course to stand as much as 3.8 percent lower
ahead of a mixed opening on Wall Street.
Bonds, which fell on the spurt in Japanese shares, cut their
losses as the equity rally evaporated.
A wave of yen buying hit the market after Japan's ruling Liberal
Democratic Party submitted bills to parliament that would allow
the government to intervene in the operations of ''extremely
undercapitalized'' banks.
The case for selling dollars for yen was further encouraged by
Federal Reserve Chairman Alan Greenspan, who said the U.S.
central bank had to be especially alert to risks from unknown
forces shaking global markets.
That was interpreted as suggesting he was ready to look again at
cutting U.S. interest rates.
The dollar was as weak as 122.69 yen, compared with 131.26 late
Tuesday in Europe. There were rumors that one major U.S. hedge
fund began unwinding a $35 billion long dollar/yen position, of
which about $10 billion was dumped overnight, traders said.
''The dollar has been under severe pressure against all other
currencies, and now dollar/yen is catching up with what has been
happening to dollar/Europe,'' said Peter Von Maypole, currency
strategist at Credit Suisse First Boston.
''This goes beyond just what is happening in Japan...it's a
recognition that the U.S. economy has suffered more severely than
other economic blocs because of the crises in Latin America and
Asia,'' Von Maypole said.
The dollar was also under pressure against the mark, hitting a
20-month low of 1.6052 after Bundesbank President Hans Tietmeyer
said in a newspaper interview that European rates must fall to
the German level before rates in Germany can fall.
''This should not be seen as too unexpected. Tietmeyer is taking
the speculation of a core Europe easing out of the market,'' said
James McKay, chief European economist at Commonwealth Bank of
Australia.
''I expect European rates to come down but under the auspices of
the European Central Bank and probably in the second quarter of
next year.''
The prospect of a quarter-percentage point cut in British rates
as soon as Thursday, however, sent sterling to a 16-month low
against the mark at 2.7251 marks.
The chances the British repo rate will be cut Thursday, after a
two-day meeting of the Bank of England's rate-setting Monetary
Policy Committee, were put at 55 percent, according to the latest
Reuters survey.
The dollar's plunge helped reverse an early rise in European
stocks, particularly in Germany, where the profits of the many
export-dependent companies are hurt by a stronger mark.
Frankfurt's Xetra DAX index of electronically traded shares was
one of the biggest losers among leading European indexes,
standing more than 3.5 percent weaker in late afternoon trade.
London's FTSE 100 was more than one percent down while the Paris
CAC 40 index was off over 2.5 percent. Dutch stocks were the
worst hit, falling 3.7 percent.
Shares in German car companies, among the nation's leading
exporters, shouldered big losses. BMW and Volkswagen both fell
more than six percent.
Shares were volatile in late afternoon trade as the Dow Jones
Industrials Average gyrated between plus and negative territory.
It was up about 0.6 percent in late European trade, despite
Greenspan saying in a speech in Washington that the outlook for
the U.S. economy had weakened significantly
The fall in stocks and Greenspan's comments helped bonds cut
losses incurred after the Tokyo stock rally.
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