Monday August 10, 3:48 pm Eastern Time
Asia devaluation may leave crater on Wall Street
By Marjorie Olster
NEW YORK, Aug 10 (Reuters) - A currency devaluation by China or Hong Kong may leave a crater on Wall Street that would make last Tuesday's sell-off look more like a pothole.
The Dow industrials slumped 299 points, or about 3.4 percent, in a single session last week and that was in the absence of any major news out of Asia or the United States.
A slide in the yen on Monday to within striking distance of its eight-year low against the dollar has fanned speculation that either China or Hong Kong will soon devalue their currency to stay competitive in export markets.
It is feared such a move would have a domino effect on other Asian currencies with global repercussions.
''The potential would be there for a much greater than three percent decline in the major averages,'' said Bill Meehan, chief market analyst at Cantor Fitzgerald.
''It would test patience of investors...I don't know who is going to take the other side of trade.''
Asia's financial crisis and its impact on the U.S. economy and corporate profits have been at the center of concerns on Wall Street over the past months.
A round of devaluations in the region would further depress global commodity prices and hurt shares of western companies with Asian exposure.
On Sunday, Chinese President Jiang Zemin repeated Beijing was determined to avoid devaluing the yen.
''I don't think it is going to happen,'' Morgan Stanley Dean Witter U.S. equity strategist Peter Canelo said of the prospects for a Chinese devaluation.
The political costs for China would be high. It would lose face on the world stage by breaking a pledge and would put pressure on other countries in the region to follow suit.
It could also lead to social disruptions as the value of people's savings fell overnight and import inflation pushed prices up.
''They don't gain anything. One of China's really important needs is foreign capital. If they devalued the Hong Kong or Chinese currency, it would shut the window to foreign capital,'' Canelo said.
Chinese leaders have hinted Beijing's will to resist a devaluation depends on Japan's ability to keep the yen from depreciating further.
But on Monday, the dollar came within a hair of its eight-year high against the yen at 146.75, reached on June 16.
China stepped into the foreign exchange market Monday to defend its currency, underscoring earlier hints that yen weakness may force Beijing to devalue. It was the third time since July 31 the central bank had intervened.
If it did come to a devaluation, the U.S. stock market would face another major sell-off that could take the Dow as low as 8000, Canelo said.
''The markets are pretty shaky anyway and it certainly wouldn't help.''
In Hong Kong, an administrative region of China, the Hong Kong dollar came under attack last week as speculators bet on a future devaluation of the yuan. Vietnam already devalued the dong by 9.1 percent on Friday.
A similar move out of China or Hong Kong would have damaging repercussions throughout emerging markets while dampening hopes for any quick turnaround in the Asian financial crisis.
It would also raise doubts about an improvement in U.S. corporate profits next year.
''An event like that would call 1999 estimates into question and pull the carpet out from under the market,'' said Meehan. ''The risk is there and that is one more factor that makes this a fairly expensive market.''
Stuart Freeman, chief equity strategist at A.G. Edwards and Sons, said the market's knee-jerk reaction could be a drop of several hundred points in the Dow to the 8300 level.
The Dow touched an intra-day low of 8361 last Wednesday but had recovered to around 8600 by Monday afternoon.
In the longer run, a round of devaluations in Asia could benefit Japan by allowing the weak yen to stimulate the economy, some analysts said.
Canelo said for that reason, he would view any pullback in stocks as a buying opportunity with an eye toward a recovery soon after. |
