Dollar Drops as Prime Rate Is Trimmed
The dollar staged a sharp and broad retreat Tuesday as the prime lending rate at major U.S. banks returned to single-digit territory for the first time since October, 1978, and expectations grew for further interest-rate relief.
With interest rates and the dollar falling, gold rose to its highest levels in two months. Republic National Bank of New York said gold bullion was bid at $327.50 an ounce, up $8.75 from Monday.
In its slide, the dollar briefly dropped below 3 West German marks before recovering slightly to hold above that psychologically important level.
Meanwhile, the British pound surged up to $1.2972 in London from $1.28 on Monday, reaching its highest European closing level since Sept. 3, 1984, and up 24.8% from the all-time low of $1.0395 reached during trading Feb. 26.
Later, in New York, sterling shot up further, rising to $1.31575 against $1.2820 on Monday.
The Federal Reserve Board said its measure of the dollar against 10 other major currencies fell 1.36% from Monday.
“People are a little afraid . . . that we’ll be breaking out into a downtrend now,” said Howard Kurz, chief currency trader at Bank of America’s trading center in New York. “Investments look more attractive in other places.”
Falling interest rates in the United States make returns less attractive on dollar-denominated investments. On the other hand, lower interest rates make gold and other commodities that pay no interest more attractive.
Currency analysts said the dollar fell in response to a cut by Morgan Guaranty Trust of New York in the prime lending rate to 9 1/2% from 10%. Major banks nationwide quickly followed the move to lower the base for computing interest charges on short-term business loans.
It was the first time in nearly seven years that a major U.S. bank has offered a prime rate below 10%, and currency dealers said the move raised expectations that the Federal Reserve Board would soon lower its discount rate from the 7.5% rate that has prevailed for the past month.
The discount rate is the interest rate the Fed charges for loans to financial institutions.
“It appears that the Fed may be orchestrating lower interest rates to weaken the dollar to protect U.S. manufacturers from overseas competition,” said Gary Dorsch, a currency analyst at Oppenheimer Rouse Futures in Chicago.
The dollar also was hurt by a government report that U.S. housing starts fell 13.7% in May, the sharpest monthly drop since March, 1984.
The construction report followed earlier government reports of declines in industrial production and factory use and led some analysts to lower their estimates of economic growth in the United States.
On Thursday, the U.S. Commerce Department is scheduled to release its “flash” estimate of economic growth for the yet-to-be-completed second quarter.
Dollar Falls to Yen
In Tokyo, where trading ends before the European business day begins, the dollar fell to 247.90 Japanese yen from 248.90 yen Monday. Later, in London, the dollar was quoted at 247.62 yen. By the end of the trading day in the United States, the dollar had fallen to 246.625 yen against 248.60 yen Monday.
Other late dollar rates in Europe, compared to rates Monday, included: 3.0340 West German marks, down from 3.0665; 2.5507 Swiss francs, down from 2.5772; 9.2765 French francs, down from 9.3525; 3.4275 Dutch guilders, down from 3.4575; 1,939.90 Italian lire, down from 1,953.12, and 1.3678 Canadian dollars, down from 1.3685.
Dollar rates in New York, compared to rates Monday, included: 3.00125 West German marks, down from 3.05525; 2.5140 Swiss francs, down from 2.5690; 9.1650 French francs, down from 9.3325, and 1.36475 Canadian dollars, down from 1.3711.
As bullion markets resumed trading in Hong Kong after being closed since Saturday for holidays, gold rose $4.09 to close at a bid of $319.74 an ounce.
In Europe, gold climbed $5.75 in London to $324.75 an ounce, and gold gained $3.75 in Zurich to $323.50 an ounce.
On the New York Commodity Exchange, gold bullion for current delivery shot up $8.80 to $327.70 an ounce, its highest finish since the $328.50 of April 19.
Silver climbed 10 cents in London to a late bid of $6.36 an ounce. Later, on New York’s Comex, silver bullion for current delivery jumped 24.4 cents to $6.482 an ounce.
