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Dollar Weakens on Mark’s Strength, Mexico Malaise, U.S. Economic Signals

March 15, 1995

NEW YORK (AP) _ The dollar slumped Wednesday, backsliding toward record lows vs. key currencies on anxiety over U.S. exposure to Mexico’s malaise, signs of domestic inflation and voracious demand for the mighty German mark.

``There was pretty sad behavior on the dollar’s part today,″ said Jay Wertheimer, a foreign exchange trader at the New York office of Italy’s Banco di Sicilia.

The dollar’s weakness reversed a partial rebound on Tuesday, when evidence of benign U.S. inflation incited a strong rally in American stocks and bonds, which created a higher demand for dollars needed to buy them.

Traders said the dominant theme in the foreign exchange market Wednesday was the relentless appetite for the German mark, which is now seen as the most secure currency for global investors to park their holdings.

A budget crisis in Italy and treasury refunding problems in Spain were the key catalysts for the move into the mark, which hit a record high vs. the Italian lire and surged against all other currencies. The dollar suffers when the mark is popular because investors sell the U.S. currency to buy marks.

The anemic Mexican peso, meanwhile, aggravated worries about Mexico’s financial crisis and how it could hurt the American economy. Mexico is the U.S.’s third-largest trading partner.

The peso closed 4.5 percent weaker against the dollar Wednesday, eroding for a third straight day. It took 6.95 pesos to purchase $1, vs. 6.63 to the dollar Tuesday.

Demand for pesos was paltry despite soaring yields offered on Mexican treasury securities, which should have attracted investors into pesos. The annualized return on short-term bills auctioned Wednesday reached 92.50 percent, a sign of the risk many investors feel they’re taking in Mexico.

``You’ve got some problems in the Western Hemisphere, so the mark is perceived as the safer haven-type currency,″ said Jack Griffin, vice president of corporate trading at the foreign exchange desk of Japan’s Fuji Bank branch in New York.

In late New York trading, the dollar fetched 1.3900 German marks, down nearly 2 percent from its 1.4165 level the day before. The dollar hit a postwar low of 1.3440 marks last week.

The dollar also fetched 89.45 yen, down from 90.85 yen the day before. The dollar hit a postwar low of 88.78 yen last week.

Traders said the dollar’s instability reflected a tremendous predisposition to sell the U.S. currency. Many didn’t rule out new lows against the yen and mark in coming weeks and months.

``We’re in technically uncharted territory with the dollar, and anything is feasible,″ Griffin said. ``I wouldn’t say this is the bottom.″

The dollar’s weakness was further fanned by fears of incipient inflation, caused by a Labor Department report that wholesale prices climbed 0.3 percent in February while industrial production shot up 0.5 percent, pushing the factory operating rate to its highest level in more than 15 years.

Those reports were much stronger than expected and diminished the view that prevailed a day earlier, when the government’s report of a big drop in American store sales was seen as evidence of benign inflation.

Other late dollar rates in New York, compared with late Tuesday: 1.1525 Swiss francs, down from 1.1770; 4.9440 French francs, down from 5.0185; 1,691 Italian lire, up from 1,690; and 1.4120 Canadian dollars, down from 1.4136.

The British pound was quoted in New York at $1.5995, up from $1.5845. Earlier in London, the pound was quoted at $1.6040, up from $1.5875 late Tuesday.

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