Dollar Plunges on Rumor of Devaluation; Gold Rises

The dollar plunged in domestic trading Friday as a rumor swept through trading floors that leaders of the seven industrialized democracies--the so-called Group of Seven--had agreed to meet this weekend to devalue the U.S. currency. U.S. officials denied the rumor.

Gold prices rose.

G7--consisting of the United States, Britain, Japan, West Germany, France, Canada and Italy--agreed at its last meeting in February to hold the dollar at current levels.

The rumor spurred major foreign investors to sell dollar-denominated securities and buy West German marks and Japanese yen, said Stephen Flanagan, an assistant vice president of foreign exchange at Manufacturers Hanover Trust Co.

“The market picked up on the fact that export volume seemed to decrease,” and that, coupled with the G7 rumor, worked to drive the dollar sharply lower, Flanagan said.

The dollar closed mixed in Europe, where the G7 rumor reached the market late in the trading session. “It was catching Europe by surprise,” said Zlatko Glamuzina, chief dealer at the Banco di Sicilia in New York.

Despite the turmoil in the world’s stock markets, the dollar remained relatively firm throughout the week until Friday’s session. Some traders speculated that the U.S. currency fell particularly hard in delayed reaction to the stock markets’ turbulence.

In Tokyo, the dollar closed at 144.15 Japanese yen, down from 144.20 yen Thursday. Later in London, the dollar traded at 143.77 yen. In New York, the dollar plunged to 141.80 yen from 144.94 yen Thursday.

The British pound rose against the dollar on news of a big decline in Britain’s trade deficit in September. The pound’s higher level remained unaffected following announcements of cuts in base lending rates by the four major British commercial banks.

In London, one British pound cost $1.6570 late Friday, more expensive for buyers than Thursday’s late $1.6560.

In New York, it cost $1.6830 to buy one pound, up from Thursday.

Other late dollar rates in New York included: 1.7782 West German marks, down from 1.8183; 1.4713 Swiss francs, down from 1.5060; 5.9555 French francs, down from 6.0700; 1,285.00 Italian lire, down from 1,310.50, and 1.3128 Canadian dollars, down from 1.3171.

Gold prices rose worldwide, and some traders predicted that the precious metal could rise to $490 an ounce if the dollar continues to decline and turmoil reigns on the world’s financial markets. Gold closed at $473.40 an ounce on the New York Commodity Exchange, up from $469.80 on Thursday.