China’s hint on euro drives stocks, dollar down
WASHINGTON - The value of the dollar fell sharply Wednesday, as did the stock market, after the Chinese government signaled that it may slow its purchases of U.S. assets.
The Dow Jones industrial average plummeted 361 points, or 2.6 percent, as the dollar fell to an all-time low relative to the euro and was sharply lower against other currencies. The fall in stocks reflected worries that the dollar would continue to slide, which would make the dollar-based earnings of U.S. companies less valuable relative to foreign investments.
“The Dow Jones is measured in dollars, not bananas,” said Peter Schiff, president of Euro Pacific Capital. “As the dollar loses value, U.S. stocks lose value.”
The Dow fell 360.92 to close Wednesday at 13,300.02.
The Standard & Poor’s 500 index fell 44.65, or 2.9 percent, to 1,475.62 - moving below the psychological benchmark of 1,500. The Nasdaq composite index fell 76.42, or 2.7 percent, to 2,748.76.
More euros for China
Top Chinese officials suggested at a conference Wednesday that they would direct more of their future reserves into European assets - that the euro, not just the dollar, would increasingly be a currency of choice.
For years, China has kept its currency artificially low relative to the dollar by buying hundreds of billions of dollars worth of U.S. assets, especially Treasury bonds. This has made Chinese imports inexpensive in the U.S. and made it cheap for Americans to borrow money.
“There is no doubt that in the medium to long run, they will be diversifying their currency assets,” said Domenico Lombardi, president of the Oxford Institute for Economic Policy. “But it is likely that people are overreacting to the latest comments. We ought to wait a little bit before we make a firm judgment on what it means.”
Since mid-August, the price of a euro has risen to $1.46 from $1.34, an unusually large increase. Part of the drop in the dollar has come about because the Federal Reserve, by cutting U.S. interest rates twice in the past two months, has lowered the returns that one can earn by saving dollars.
Dollars and exports
A cheaper dollar was not unexpected when the central bank cut interest rates. In fact, it is one of the ways that lower interest rates stimulate the economy. A cheaper dollar makes U.S. exporters more competitive in global markets. Economists are expecting a stronger export sector will help ease the pain from the sharp decline in the housing industry.
But a weak dollar could also spur inflation. Part of the reason that prices for oil and other raw materials have risen sharply in the past month is that the dollar is worth less.