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Wall St. Buckles, Bounces Back
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Asian stocks continued to drop early today, the Associated Press reported. Tokyo's benchmark Nikkei 225 was down 2.33 percent in morning trading. South Korea's main indicator fell more than 2 percent before rebounding.
For years, hedge funds and others have borrowed money at Japan's ultra-low interest rates and invested it in the United States, where rates are higher, in effect making money for nothing. But with short-term interest rates falling in the United States, the trade does not work as well. So many investors are trying to get out at once that they are bidding up the price of the yen while flooding the market with dollars.
With investors continuing to pull money out of risky assets and convert it to cash, the Federal Reserve Bank of New York added $17 billion to the banking system yesterday and signaled that such interventions were likely to continue. The bank has repeatedly undertaken such transactions in the past two weeks as it attempts to keep the federal funds rate, the rate banks charge each other for overnight loans, at its target of 5.25 percent.
The New York Fed had company around the world, as central banks in Japan and Australia also added money to their financial systems.
In a statement, the New York Fed said that in the next two weeks, it expects to need to make such moves "on most days." The statement signaled to financial markets that they should not be surprised if the Fed continues to add funds each day to keep money markets stable.
The Dow Jones industrial average closed down 15.69 points, or 0.1 percent, at 12,845.78. It is up 3 percent for the year, but off more than 8 percent from a record high set barely a month ago.
The technology-heavy Nasdaq composite index fell 7.76, or 0.3 percent, to 2451.07. The Standard & Poor's 500-stock index, a broader measure, finished up 4.57, or 0.3 percent, to 1411.27.
Tse reported from New York. Staff writer Michael Fletcher in Crawford, Tex., contributed to this report.
