The dollar plummeted Wednesday in a wave of selling that dragged it to its lowest level of the year.
Traders said falling interest rates in the United States, fears about problem energy and real estate loans held by Texas banks and technical market factors combined to contribute to one of the dollar's biggest losses ever.
In its slide, the dollar lost about 5 cents to the British pound and about 6 pfennigs to the West German mark. There are 100 pfennigs to the mark.
"It got hammered," said Gary Dorsch, a foreign currency analyst at Oppenheimer Rouse Futures Inc. in Chicago.
Gold prices rose sharply in Hong Kong and Europe but wound up in the United States below their highs for the day. Republic National Bank in New York said gold bullion was bid at $327.25 an ounce as of 4 p.m. EST, up $3.25 from the late bid Tuesday.
Typical of the dollar's downturn was its trading against the Japanese yen.
Dollar Plunged Further
In Tokyo, the dollar fell to 254.00 yen from 256.97 yen Tuesday. Later, in London, the dollar plunged further, to 252.90 yen.
By the end of the trading day in the United States, the dollar had recovered slightly to 253.975 yen but still was below Tuesday's late rate of 255.375 yen.
The Federal Reserve Board said its measure of the dollar against 10 other currencies fell 2.34%, almost as steep as the 2.39% slide of March 19, which was the dollar's biggest daily setback since the 10% devaluation in February, 1973.
The sell-off has reduced the dollar by 8.4% from the all-time high reached Feb. 25 and left the U.S. currency 0.4% below levels at the end of last year. But the dollar still was 75.8% above the depressed levels it held when the 1980s began.
Mory Ogata, senior vice president and treasurer of Union Bank of Los Angeles, said selling picked up as the dollar fell through exchange rate levels that some technical traders viewed as important support levels. He said that, as the dollar dropped below 3.18 West German marks and later 3.15 marks, dollars were sold by traders who had earlier directed their dealers to dump the currency at those levels.
Dorsch said that, even if all traders were not convinced that the dollar should fall so sharply, they were not about to disagree with the short-term trend in the market.
Shift in Thinking
"If nothing else, it indicates to traders a shift in thinking," Dorsch said of the dollar's slide. "You can't afford to hold on to a position, and you sell at any price."
Psychology once more turned against the dollar after reports earlier in the week that bad real estate and energy loans could hurt profits at some Texas banks. The worries about the Texas banks followed earlier concern when 70 Ohio savings and loans were briefly closed out of fears of a run by depositors.
Meanwhile, a key short-term interest rate fell and the Federal Reserve took no steps to push it higher.
The federal funds rate, the interest on overnight loans between banks, has not traded above 8.5% this week and fell below 7% on Tuesday.
Dorsch said that the drop in the federal funds rate has created a perception that the Federal Reserve is prepared to push interest rates lower to prop up economic growth and avoid financial difficulties at a time of uncertainty about bank problems.