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Dollar Advances on Trade Agreement

June 28, 1995

NEW YORK (AP) _ The dollar surged Wednesday, hitting its highest level against the yen in more than a month, on news of a U.S. agreement with Japan that averted a costly trade brawl.

Within hours of an 11:59 p.m. deadline, the United States and Japan announced they had reached a deal that would help American carmakers sell more vehicles and parts in Japan.

Without such an agreement, the United States would have slapped 100 percent tariffs on 13 Japanese luxury imports, the most punitive trade sanctions ever imposed by Americans.

Japanese-U.S. friction over Japan’s chronic trade surpluses with the United States has been a major source of weakness for the dollar. So word of the agreement reached in Geneva sent foreign exchange traders into a scramble to buy dollars, boosting the currency’s value.

``It was just a dollar rally on the back of that news. We all got busy at the same time,″ said Paul Alley, an associate at the New York branch of Long-Term Credit Bank of Japan Ltd.

The dollar rocketed to a high of 86.00 yen soon after word of the agreement was reached. That’s the highest level for the dollar since May 25 when it reached an intraday peak of 87.30 yen.

Profit-taking and some resilient doubts about the effectiveness of the trade deal eroded some of that gain. But in late New York trading, the dollar was still higher at 85.68 yen, up 1.8 percent from 84.18 yen Tuesday. The dollar also fetched 1.3970 German marks, up from 1.3863 Tuesday.

Even before negotiators proclaimed they’d reached an agreement, some traders had been buying dollars because of press reports indicating progress.

``I think this reflects a lot of pent up demand that is using the trade agreement to buy dollars, primarily on the part of U.S. corporations and portfolio managers,″ said Jonathan Lopatin, a partner at Goldman, Sachs & Co. ``It got more intense as the headlines appeared.″

Once the news of the agreement had permeated the market, some traders began expressing skepticism about how long the dollar would derive strength from it. They noted that President Clinton had described the pact as significant advance that would dismantle Japanese trade barriers, but there were few specifics released about how compliance would be monitored.

``The fact that the market didn’t get a greater boost out of this is, I think, evidence they are looking to see how meaningful and concrete this agreement is,″ said Peggy Reed, a vice president in the New York office of Credit Agricole.

Others said the dollar was still under pressure because of expecations that the Federal Reserve might lower interest rates at its next policymaking meeting in July because of increasing evidence that the economy is weakening. Such a step would tend to make dollar-denominated assets worth less.

Other late dollar rates in New York, compared with late Tuesday: 1.1600 Swiss francs, up from 1.1470; 4.8960 French francs, up from 4.8740; 1,636 Italian lire, up from 1,623; and 1.3743 Canadian dollars, unchanged.

The British pound was quoted at $1.5755, down from $1.5840.