Stocks dive sharply as dollar falls

NEW YORK — NEW YORK -- U.S. stocks plunged for a third day yesterday as the dollar slumped to record lows, raising concern that the Federal Reserve may raise interest rates to prop up the currency.

The Dow Jones industrial average tumbled 33.93 points, or 0.91 percent, to 3,707.97, its lowest close since May 9 and bringing its decline since June 16 to 2.7 percent. Higher interest rates may curb the economy's growth along with corporate earnings.


Losses in Caterpillar Inc., Walt Disney Co. and General Electric Co. fueled the decline.

"The dollar was the spark that started the fire," Christie McClellan, head trader at Robertson, Stephens & Co. in San Francisco, said. The dollar slipped to 100.30 yen, after dipping below 100 for the first time since World War II, and fell to 1.5950 German marks.


As investors sought a haven amid declining stock and bond markets, gold rose to its highest price this year, flirting with the $400-an-ounce milestone. Gold bullion for current delivery settled $394.30 a troy ounce, up $5.40 from late Monday, on the New York Commodity Exchange.

Electrical equipment, software, electric utility, automobile and financial stocks fueled the broad stock market decline. A warning from Lotus Development Corp. that second-quarter earnings won't meet analysts' estimates triggered a sell-off among software and other technology shares.

Late Monday, Lotus said delays in shipping new versions of its personal computer software mean second-quarter earnings will be about half analysts' average forecast of 48 cents per share. Lotus collapsed $14.375, to $37.

Concern about earnings at technology companies spilled over to other software makers. Microsoft Corp. dropped 87.5 cents, to $52.625; Computer Associates International dropped $1.75, to $38.375; and BMC Software Inc. fell $1.375, to $46.50.

Among broader market indexes, the Standard & Poor's 500 Index slid 4.14, to 451.34. The Nasdaq Combined Composite Index dropped 10.06, to 708.79, fueled by losses in Lotus, Microsoft, U.S. Healthcare Inc. and Intel Corp.

More than 17 stocks fell for every four that rose on the New York Stock Exchange, where 293.7 million shares changed hands, up from 229.1 million Monday.

"The overriding concern is the weakness of the dollar," said Joseph DeMarco, head of equity trading at HSBC Asset Management, a unit of Hongkong & Shanghai Bank. "There's a fear of stagflation, with little to no growth plus inflation, and that's the worst of all possible worlds for the stock market. The market is waiting for some guidance, some direction from the Fed, and it's not coming."

A weak dollar can discourage overseas investors from buying U.S. stocks and bonds, and may fuel inflation by raising prices for imports.


Stocks also reacted to renewed weakness in the Treasury bond market, where yields on the benchmark 30-year government bond rose to 7.49 percent from 7.46 percent.

Bond prices fell on speculation the Fed will raise rates and after the Commerce Department said the U.S. trade deficit widened 22 percent in April, to $8.4 billion, as imports grew and exports dropped.

U.S. stocks are increasingly less attractive in comparison with one-year Treasury bills, traders said. One-year Treasury bills yield 5.27 percent, up from 3.58 percent at the end of last year.

"If rates go up, is it worth the risk to be in equities, when you can put money in interest-bearing securities and get a good night's sleep?" said William Allyn, head trader at Jefferies & Co. in Short Hills, N.J.

Concern also spread about the strength of corporate profits in the second quarter, said Barry Berman, head trader at Robert W. Baird & Co. in Milwaukee.

"I haven't seen any earnings surprises on the upside. Lotus is a negative surprise and Damark is another," he said.


Damark International Inc., a Minneapolis retailer, said earnings for the second quarter will fall below analysts' expectations because of sluggish catalog sales and higher overhead expenses. The stock fell $2.875, to $6.625.