The dollar's dramatic slide is turning out to be a mixed blessing for the international operations of major U.S. banks.
Increased volatility in foreign exchange trading -- and in related derivative products, such as options -- augurs for improved earnings at the currency trading desks of major U.S. banks. But analysts and bankers said some of these gains could be offset by increased overseas operating costs.
"Banks like volatility, and it has probably been good for the ones that were positioned properly," said Raphael Soifer, a banking analyst with Brown Brothers Harriman & Co. in New York.
"But it could also mean a couple of percentage points increase in operating expenses for banks with a substantial presence in other countries."
Mr. Soifer cited Citicorp, Bankers Trust New York Corp., J.P. Morgan & Co., and Chemical Banking Corp. as banks that stand to gain in the short term from spot trading activities. To some extent, BankAmerica Corp. is also in that category, he said.
However, Mr. Soifer said, they could ultimately suffer if the dollar continues its downward spiral.
Spokesman at major U.S. banks trading currencies were either unavailable or declined to discuss the impact of the dollar's fluctuations.
"We can't indicate what earnings will look like before a quarter ends," said a spokesman for Bankers Trust, one of the largest foreign currency traders worldwide.
Major money-center banks, such as Citicorp, Bankers Trust, and J.P. Morgan, are dominant players in currency markets, earning millions of dollars from foreign exchange trading annually. Banks can profit sharply from large fluctuations in currency exchange rates.
However, analysts cautioned against anticipating a surge in quarterly earnings based on only a few days' movements in the currency markets.
"You'd need a sustained move over . . . several weeks before you'd see any major results," Mr. Soifer said.
"In the near term it does present good trading opportunities for major money-center banks, but trading profits come and go," said Ron Mandel, an analyst with Sanford C. Bernstein & Co.
He noted that the dollar would have to stabilize at a much lower level before it would have a significant impact on U.S. banks' foreign expenses.
Consumers Feeling the Jitters
The dollar continued its slide to new all-time lows against others currencies Tuesday morning after being hit by unexpectedly weak U.S. consumer confidence data for August.
It stood at 1.4010 German marks an 124.80 yen at mid-day down from 1.4070 and 124.87 at the open.
The dollar has fallen mainly because of the widening gap between interest rates in the United States and other countries.
Traders predicted it could fall still further over the next few days in the absence of any move by Federal Reserve Board to boost domestic interest rates.
Stock market reaction remained negative Tuesday on the assumption that a lower dollar will end a steady decline in interest rates and limit increased profits.
Bank stocks were mostly off again for the second day running. By Tuesday's close, Bankers Trust was down $1 to $59, Chemical was off 62.5 cents to $31.50, Morgan unchanged at $58.625, BankAmerica up 12.5 cents to $42.50, and Citicorp down 25 cents to $16.50.
|Opportunity to Make Money'
However, foreign exchange managers at banks reacted bullishly to the increased volatility of the dollar and increased fluctuations between other currencies, such as the British pound against the German mark.
"It's an opportunity to make money after a pretty slow first half year," said Earl I. Johnson, vice President for foreign exchange at Harris Bank in Chicago.
"Spot business is only one piece of the picture," said David Puth, manager of foreign exchange at Chemical.
Any rise in volume or volatility, he and other bankers said, also tends to boost transactions in related activities, such as interest and currency rate swaps and options and cross-trading in other currencies, such as the Swiss franc against the mark or yen.