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Dollar Crashes Though Key Levels in Hectic Trading

October 29, 1987

NEW YORK (AP) _ The dollar plunged to new lows against several foreign currencies Wednesday despite concerted central bank intervention.

The dollar’s drop accelerated after a top European trade official said the Reagan administration was willing to let the U.S. currency pierce post-World War II levels against the West German mark.

But Treasury officials quickly denied the comments made by Jacques DeLors, president of the European Community Commission.

After moving lower in Europe, the dollar continued to trade in New York at a seven-year low against the West German mark, a five-year low against the British pound and a post-war low against the Swiss franc.

Traders said the dollar’s plunge was halted only temporarily by what appeared to be concerted intervention by the central banks of Britain, West Germany, France, Italy, Switzerland and other countries.

Analysts said a profound loss of confidence in the U.S. economy has hurt the dollar, whose fate is dependent upon government policy, economic fundamentals and other financial markets.

In New York, the dollar fell to close at 1.7389 West German marks, from 1.7565 marks on Tuesday. The last time the dollar traded as low against the mark was on Jan. 25, 1980, when it reached 1.7318 marks.

It cost $1.7233 to buy one British pound, sharply more expensive than the $1.7051 it cost on Tuesday. On Oct. 12, 1982, it cost $1.7180 to buy one pound.

The dollar crashed through the psychological barrier of 140 Japanese yen and closed at 138.75 yen, down from 140.90 on Tuesday. The dollar traded in the 137-yen range in April.

In trading Thursday in Tokyo, the dollar slipped a bit further, falling to 137.90 yen shortly after the opening before recovering to 138.10 yen at mid- morning. The dollar had closed at 140.75 yen Wednesday in Tokyo.

The dollar fell in New York to its lowest point against the Swiss franc since World War II, dropping to 1.4350 francs from 1.4468 on Tuesday. Its previous low was 1.4510 on Sept. 26, 1978.

Lower interest rates, which are needed to support the volatile stock market and the economy, ″spell out a weaker dollar, and foreign currency markets react to that very quickly,″ said Jack Barbanel, a senior vice president at Gruntal & Co., in explaining the dollar’s nosedive.

At the same time, however, the United States must continue to attract foreign investors who finance the twin trade and budget deficits. If those investors cannot be lured with the promise of higher interest rates, the path of least resistance is to lower the dollar, several analysts said.

The administration is ″caught between a rock and a hard place″ in terms of what it can do to manipulate interest rates and prevent the economy from spinning into a recession, Barbanel said.

″The only way we’ll be able to support the dollar is through central bank intervention,″ he said.

But central banks are not able to continually commit substantial amounts of capital to prevent a plunge. Intervention typically is used as a means to prevent a free-fall by smoothing out a decline.

Claus Koehler, director of West Germany’s central bank, said Wednesday the coordinated intervention showed the ″Louvre accord″ was still valid.

Traders have been concerned since last week’s dramatic stock market crash that there may be a weaking of the Louvre accord, an agreement reached in February among the seven major industrialized democracies to support the dollar.

DeLors, in an address before the European Parliament in Strasbourg, France, said the United States is willing to let the dollar drop to 1.6 West German marks, well below its post-war level of 1.7 marks.

He pointed to the U.S. deficit as the main cause of the current economic crisis but also blamed Western Europe for doing too little to boost economic growth.

West German officials in recent months have repeatedly urged a reduction in the U.S. budget deficit, saying it is one of the primary causes of the continued weak dollar. The United States, in turn, has complained that West Germany is not carrying its fair share of the international economic load.

U.S. officials say West Germany, as one of the world’s richest nations, should take steps to stimulate its economy to help boost worldwide economic growth and take pressure off the dollar.

But despite the havoc a lower dollar can cause in currency markets, it can be a boon to U.S. multinational corporations and improve the U.S. balance of payments by making domestic-made goods cheaper in relation to their foreign counterparts.

″Realistically, if the dollar falls another five to ten percent, we won’t be hurt,″ Barbanel said.

He noted that Americans, who survived double-digit inflation in the 1970s, ″certainly have the ability to deal with inflation at six to eight percent.″ Inflation currently is running at about 4 percent to 5 percent for the year.

″The critical issue is that dollar falls in orderly fashion and that we don’t have one-time crash that we’ve seen in stock market,″ Barbanel said.

In Tokyo, the dollar closed at 140.75 Japanese yen, down from 142 yen at Tuesday’s close. Later in London, it fell to 139.25 yen.

In London, the British pound rose to $1.7105, up from $1.6895 late Tuesday.

Other late dollar rates in Europe included: 1.7500 West German marks, down from 1.7695; 1.4435 Swiss francs, down from 1.4620; 5.8735 French francs, down from 5.9395; 1.9735 Dutch guilders, down from 1.9950; 1,269.50 Italian lire, down from 1,281.50; and 1.3183 Canadian dollars, up from 1.3175.

Other late dollar rates in New York included: 5.8340 French francs, down from 5.8960; 1,255.85 Italian lire, down from 1,270.50; and 1.3169 Canadian dollars, down from 1.3188.

Gold prices were mostly higher. Republic National Bank in New York reported a late bid for gold of $477.25 a troy ounce, up from $476.10 Tuesday.

On the New York Commodity Exchange, gold rose to $477.50 a troy ounce from $475.70 on Tuesday.

In London, gold was quoted at a late bid price of $476 a troy ounce, unchanged. In Zurich, gold jumped to $478.50 bid from $472.50 late Tuesday. Earlier in Hong Kong, gold rose to a closing bid of $475 from $472.88 at Tuesday’s close.

Silver fell to $7.346 a troy ounce on New York’s Comex, from $7.355 on Tuesday. In London, sliver rose to a late bid price of $7.40 a troy ounce from $7.37 late Tuesday.

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