Newspaper article St Louis Post-Dispatch (MO)

The Whitewater Mess Could Boil over into the Market

Newspaper article St Louis Post-Dispatch (MO)

The Whitewater Mess Could Boil over into the Market

Article excerpt

The Whitewater Development mess could do serious harm to the stock market.

How do you get from a scandal in little ol' Arkansas to trouble on Wall Street? You get there by way of the dollar.

Here's the chain of events that could occur if the Whitewater probe renders President Bill Clinton an ineffective leader.

The dollar, already under intense pressure, could start to fall if foreign investors decide that putting their money in the United States is too risky.

The most pressure on the dollar of late has been against the Japanese yen. And some of the dollar's decline could have been intentional. Washington had been talking down the value of our currency as a way to make American products more competitive with Japanese goods.

The trouble occurs if the dollar's weakness vs. the yen affects its performance against other major currencies. At that point, the Federal Reserve would have to take action to support the U.S. currency.

At first the Fed might simply try to purchase dollars in the open market. But that's only a stopgap measure. Eventually the Fed will have to consider increasing interest rates. A move like that would have a more lasting impact on the dollar's value.

But raising interest rates will hurt the bond market. And if bond prices fall enough - which would cause rates to climb - investors will have a very attractive alternative to putting their money in an increasingly shaky stock market.

Interest rates have been climbing for the last few months mainly because the U.S. economy showed surprising strength in the fourth quarter of 1993. That was primarily due to weather-related spending increases by consumers.

The market's move made it easier for Alan Greenspan to raise interest rates slightly in early February.

But if Whitewater does ripple through the currency markets, Greenspan will have no choice but to increase rates again. And he'll have to hike rates no matter how well, or badly, the economy has been performing in the first quarter of 1994.

There are very important side issues here which, while recently pushed to the background, could end up becoming important because of Whitewater.

Any pressure on interest rates could be intensified, for instance, by the federal budget deficit. …

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