Dollar Slumps Despite Bush’s Sign of Support

The dollar Wednesday resumed its slump on concerns about the nation’s ability to fund its trade and budget deficits.

But stock and bond markets were largely untroubled by the dollar’s woes, or by a sharp rebound in oil prices on worries about U.S. supplies.

Key stock indexes inched up and long-term Treasury bond yields fell to their lowest levels in at least six weeks.

The dollar slid even though President Bush, speaking to reporters after a meeting with Italian Prime Minister Silvio Berlusconi, reiterated his support for a strong currency. Bush signaled that his administration wanted to reduce the trade and budget deficits that many economists say are largely responsible for the dollar’s weakness.

Bush pledged to do “everything we can in the upcoming legislative session to send a signal to the markets that we’ll deal with our deficit, which, hopefully, will cause people to want to buy dollars.” Bush also suggested that the Federal Reserve’s campaign since June to raise short-term interest rates was an effort to bolster the dollar.

The Fed on Tuesday raised its key rate a quarter point to 2.25%, the fifth increase this year. Bush said that was “a signal to the world markets that [Fed Chairman Alan Greenspan] is also aware of the relative currency valuations between the euro and the dollar.”

But the greenback lost ground as some currency traders focused on the latest monthly report on the flow of money into and out of U.S. securities.

The nation’s net capital inflow for the month was $48.1 billion, down from $67.5 billion in September and the smallest total since October 2003, Treasury data showed.

The net capital inflow figure measures what foreigners invest in U.S. long-term securities after adjusting for what Americans send abroad through their purchases of foreign securities.

Overall foreign demand for U.S. stocks and bonds in October was nearly the same as September, at a net inflow of $63.3 billion, the Treasury said.

The surprise in the October report was a jump in U.S. investment in foreign securities. Americans bought a net $12 billion in foreign stocks, for example, after being net sellers of foreign shares in September.

The falling dollar has boosted Americans’ returns on foreign stocks and bonds this year because those securities are worth more when translated from stronger currencies back into dollars, analysts note.

The Treasury’s October data suggested that more American investors are looking to cash in on the dollar’s weakness by sending money abroad. The problem is, that could worsen the nation’s dependence on foreign capital, experts say.

“If Americans suddenly started to really diversify their portfolios [with foreign securities] that could hurt” the dollar, said Jay Bryson, economist at Wachovia Corp. in Charlotte, N.C.

The dollar slid to 104.23 yen in New York from 105.40 Tuesday. The euro jumped to $1.341 from $1.331, nearing the record of $1.345 set Dec. 3.

Although a weaker dollar could raise the risk that foreign investors would dump their U.S. securities rather than risk further devaluation, Treasury bond prices rose Wednesday, driving yields lower.

The 10-year T-note yield fell to a six-week low of 4.08% from 4.12% Tuesday. The 30-year T-bond yield dropped to a nine-month low of 4.71% from 4.77%.

Analysts said some investors were betting that a renewed decline in the dollar would spur the central banks of Japan and other nations to buy more Treasury bonds in support of the dollar. Japan and other big exporters fear that a weaker dollar would make their products too expensive for American buyers.

“The markets now associate dollar weakness with more central bank purchases of Treasuries,” said Daniel Katzive, currency strategist at brokerage UBS in Stamford, Conn.

The stock market also shook off dollar fears. The market’s strength since October is pulling more investors in as the end of the year approaches, traders say.

The Dow Jones industrial average added 15 points, or 0.1%, to 10,691.45, the highest close since Feb. 17.

The Standard & Poor’s 500 index edged up 2.34 points, or 0.2%, to 1,205.72, a three-year high. The Nasdaq composite also hit another three-year high, gaining 2.71 points, or 0.1%, to 2,162.55.

With 11 trading days left in 2004, the year-to-date total return on the S&P; 500 index now is in double digits, at 10.2%. Total return counts price appreciation plus dividends.

Among Wednesday’s market highlights:

* Energy stocks rallied as near-term crude oil futures in New York surged $2.37 to $44.19 a barrel, the highest since Dec. 1. Oil gained after the government’s weekly report on U.S. inventories showed another decline in heating-oil supplies, raising concerns about a winter scramble to secure supplies.

Murphy Oil jumped $1.62 to $81.18, Sunoco rose $3.64 to $84.39, and Amerada Hess was up $1.47 to $85.09.

* Other commodity-related stocks also rallied, including Potash, up $1.26 to $79.81; Nova Chemicals, up $1.14 to $45.80; and U.S. Steel, up $2.19 to $51.50.

* Lehman Bros. shot up $2.25 to $87.90 after the investment bank reported quarterly earnings that beat estimates.

* Home builders roared to record highs as long-term interest rates fell. KB Home surged $4.50 to $105.50; Lennar jumped $5.52 to $56.35.

* The Dow was lifted by bargain hunting in drug stocks. Pfizer rose 99 cents to $28.32, and Merck gained 86 cents to $30.48.