The dollar plunged broadly on international exchange markets Friday, falling to a new 40-year low against the yen, despite substantial intervention by U.S., Japanese and European central banks to prop it up.
Gold and silver prices soared in response to the U.S. currency's decline, and stock and bond prices tumbled.
Despite the dollar's continued weakness, which has discouraged foreign investment in the United States, Treasury Secretary James A. Baker III disclosed that the Reagan Administration has decided not to issue new bonds in yen. Some monetary officials had suggested such a step to ensure a continuing flow of Japanese investment in the United States to help finance the nation's massive trade deficit.
But Baker told an economic policy conference: "It may well be that people would view that as a lack of confidence by the United States in its own currency. We don't think it's appropriate to do that."
Currency traders in New York said there had been some expectation that Baker's remarks would show the United States and its allies were willing to take more forceful action than in the past to support the dollar. But when Baker mentioned no new steps, the dollar continued to slide.
"The market was waiting for a signal from Baker that the politicians here and abroad were willing to do more," said Robert Franklin, a trader and vice president at Salomon Bros. in New York. "But all they heard was talk."
Focus on Interest Rates
Traders were hoping for a sign that the Federal Reserve Board might raise interest rates in the United States, that foreign central banks might lower interest rates in their countries or that the United States might take action to cut the budget deficit, Franklin said.
David Rolley, chief financial economist at Chase Econometrics, said the dollar's sharp decline in Tokyo markets early Friday was driven by traders' pessimistic reading of Thursday's announcement that the U.S. economy grew at an annual rate of 4.3% in the first three months of this year.
"All the growth was in inventory buildup," Rolley said, "and that reflects badly on what will happen in the second quarter."
In Tokyo, the dollar hit a new low of 139.05 yen before recovering slightly to close in New York at 139.45, well below Thursday's close at 140.75 yen. The dollar also fell sharply against the West German currency, dropping below 1.80 marks to 1.7845 in European trading, down from 1.806 at New York's exchange market close Thursday.
The plunge in Tokyo was reportedly hastened by a statement by Japanese Finance Minister Kiichi Miyazawa that Japan has no plans to take new emergency measures to support the dollar beyond buying dollars on the open market. The Bank of Japan made aggressive dollar purchases during the day but that did little to impede the dollar's fall.
Europeans Buying Dollars
In Europe later in the day, central banks also were reported to be selling yen and buying dollars. Among those said to have entered the market were the West German, Belgian, Dutch and Swiss central banks. The Swiss said they acted in concert with the U.S. Federal Reserve, although the size of the intervention was not disclosed, Reuters news agency reported.
Later, currency traders in New York reported that the Federal Reserve had intervened to prop up the dollar against the mark, reportedly buying dollars in the range of 1.787 to 1.791 marks. A spokesman for the Fed declined comment.
As a byproduct of the dollar's weakness, gold prices hit highs unseen in several years. The metal, traditional haven for nervous investors in unruly markets, was bid up to $466 an ounce in London, an advance of more than $10 from Thursday's close, before falling back to $464.50 at the London market's close.
On Wall Street, the Dow Jones industrial average fell about 45 points to 2,235, its lowest point since early March.
Bond prices also plummeted. The 30-year Treasury bond fell $16.25 per $1,000 face amount, and its yield rose to 8.67% from 8.52% the day before.
Against Further Fall
During his speech and in reply to questions later, Baker repeated the Administration's view that the dollar has fallen far enough and that to push it down further would be "counterproductive."
Although the Administration earlier had encouraged the dollar's fall to make U.S. goods more competitive on world markets and to help shrink the trade deficit, it has expressed concern that a continued fall would harm other nations' economies and undermine their ability to absorb more U.S. imports.
Baker repeated the Administration's public statements that the Feb. 22 agreement among the seven main industrial powers to coordinate monetary policies and take steps to stabilize the dollar is on track and succeeding.
Japan Hails Bond Proposal
The proposed U.S. issuance of bonds in yen has been hailed by the Japanese, who have been shaken by the dollar's precipitous fall. In the late 1970s, President Jimmy Carter issued bonds in Swiss francs and West German marks to keep overseas investors from bailing out and to help the Treasury fund part of its debt.
But Baker, noting the no-confidence message that might convey, said: "There are good arguments for it and good arguments against it and both arguments depend on the interpretations put on them by market psychology . . . . This matter has been considered, but it's unlikely we would undertake to do that."
Oswald Johnston reported from Washington and Paul Richter from New York.