The U.S. dollar sank in value against most other major currencies Friday, hitting a record low against the Japanese yen despite a massive effort by central banks around the world to support it.
The failure of the coordinated government dollar-buying intervention, which traders estimated at between $2 billion and $3 billion, raised concerns about U.S. financial markets and interest rates and left economists wondering just how far the U.S. currency might plunge.
“The dollar’s new all-time lows are being generated by the U.S. ties to Mexico and the panic flight right now of funds away from weak-currency countries - Mexico, Canada and now the United States,” said Allen Sinai, chief economist at Lehman Brothers in New York.
While a weaker dollar drives up inflation by making imports more expensive, analysts said the bigger threat to the U.S. economy was that currency turmoil could spill over into stock and bond markets if foreign investors start dumping their dollar-denominated assets.
A steep sell-off in bonds could drive up interest rates for everything from home mortgages to business loans.
The bond market tumbled Friday with a sell-off in the benchmark 30-year Treasury bond pushing its yield up to 7.53 percent. The stock market, however, shook off the plunge in the dollar and the bond market, and managed to post a 9.68 gain with the Dow Jones industrial average closing at 3,989.61.
The Clinton administration tried to calm market anxieties with a statement early Friday announcing it had authorized the Fed to intervene with other central banks to buy dollars, the first such coordinated intervention since June.
“A strong dollar is in our national interest,” Treasury Secretary Robert Rubin said in a prepared statement. “That is why we acted in the markets in concert with others.”
President Clinton endorsed the Treasury’s actions as appropriate but he declined further comment, saying he had learned as president “that anything I say on this subject is wrong.”
The coordinated intervention began after the dollar sank to a postwar low against the Japanese yen during trading in Tokyo. The Bank of Japan began purchasing dollars and that was followed later in the day by purchases by the Federal Reserve and the central banks of Germany, Britain, Italy, France and nine other European countries.
Their effort followed a solo rescue attempt launched Thursday by the United States.
But in both cases, traders took advantage of the government buyers to dump dollars, sending the greenback even lower.
The dollar set a record low against the Japanese currency of 93.75 yen in trading in New York. It also fell during the trading day to a 28-month low against the German mark of 1.4255.
While the Germans participated in the international rescue effort, they could not resist a little boasting about the strength of their own currency.
“The D-mark is strong! It is now the international flight currency, in view of some uncertainty in world markets,” German Finance Minister Theo Waigel said in a statement released in Bonn.
Economists blamed most of the dollar’s weakness on America’s huge trade merchandise trade deficit, which last year hit a record $166.3 billion, up 25 percent from the previous year.
The larger deficit means more dollars flowing into the hands of foreigners to pay for imports. The recent economic turmoil in Mexico raises pressure on the dollar, analysts said, because it threatens a further widening in the trade deficit.
Economists said the dollar is likely to remain under downward pressure until there is evidence that a slowdown in economic growth this year is helping to narrow the trade deficit.