Dow plunges on sign of weakness

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Wall Street fell more than 50 points in early trading yesterday, triggering the automatic circuit-breaker rule to stabilise the market, writes Paul Wallace. The dollar also weakened on the foreign exchanges as concern grew about a possible move up in Japanese interest rates.

The fall in the Dow Jones Industrial Average, which closed 48.05 points down at 5,503.32, came after figures showing a fall in US industrial production of 0.6 per cent in January, the biggest monthly drop in almost five years. While the figures were affected by the recent blizzards, they hardly pointed to strength in the economy that might prevent further interest rate cuts.

The monthly decline meant that industrial production was barely higher than a year earlier The annual growth in industrial production has collapsed from 6.3 per cent at the start of 1995 to 0.1 per cent at the beginning of 1996.

Another sign of the depressed state of the manufacturing sector was the decline in the capacity utilisation rate to 81.9 per cent. This rate, which Alan Greenspan, chairman of the US Fed, is known to watch closely, was the lowest since November 1993.

Consumer confidence was also reported weaker. The preliminary University of Michigan consumer sentiment index fell from 89.3 in January to 86.6 in February. The expectations index fell from 78.7 to 74.6

"The fundamental picture of the economy looks soft," said Mark Cliffe, international economist at HSBC Markets. He attributed the morning decline on Wall Street and the weakness of the bond market to "a collective bout of nerves over how strong the markets had been".

The dollar fell against the yen and the mark on the foreign exchanges. It closed almost 1 down at 105.34. and a pfennig down at DM1.4617.

The main reason for the dollar's weakness was growing worries about a possible rise in Japanese interest rates later this year. This concern was provoked by a statement made on Thursday by Japan's finance minister, Wataru Kubo, to the effect that low interest rates, were hurting pensioners.