An early rally in bank stocks faltered Wednesday after Federal Reserve Board Chairman Alan Greenspan told Congress that the plummeting value of the U.S. dollar is "troublesome" and could ignite inflation.
His remarks hinted at further increases in short-term interest rates. Other stocks recovered, but banks were mixed to lower in desultory trading activity.
The dollar's weakness prompted Hancock Institutional Equity Services to cut its investment rating on BankAmerica Corp. to "hold" from "buy" because of the heightened prospect of rate increases.
Shares of the San Francisco banking company were off 12.5 cents to $46.375 on volume of 1 million shares, compared to typical daily turnover of 1.2 million.
"It's hard to predict where the dollar may go this point, but perceptions about rates have very definitely changed," said James Marks, a Hancock analyst.
The impressive February rally in bank stocks was based "on the virtual consensus that rates were at or near their peak," he said. "But just the fear of rate increases now puts a cap on where banks can go."
Mr. Marks said his rating change did not reflect any specific or fundamental changes for BankAmerica, which had been his' only "buy" recommendation among large banks.
"If I had been carrying more 'buy' recommendations I would have removed them all," he said. "My outlook has been somewhat negative because of my concerns about (net interest) margin compression."
Among bank stocks hard hit in recent days, Citicorp was off $1 to $40, Chemical Banking Corp. was off 37.5 cents to $37.75, and Bank of Boston Corp., was up 75 cents to $27.25.
Shares of Midlantic Corp., Edison, N.J., jumped 78 cents to $31.78 in reaction to PNC Bank Corp.'s planned purchase of some New Jersey branch offices from Chemical.
Midlantic was strongly rumored as a buyer of the Chemical branches. Losing out to PNC, some investors apparently believe, heightens the likelihood that it will be a merger target itself.
Midlantic shares also rose last month in reaction to the planned purchase of Shawmut National Corp. by Fleet Financial Group.
