CURRENCY : Dollar Slides to 40-Year Low Against Yen; Trade Gap Cited

The dollar tumbled Monday to a 40-year low against the Japanese yen and a near-record low against the West German mark due to a belief that central banks will let the currency resume its long slide.

Dollar buying by the central banks of Japan, West Germany and Switzerland failed to halt the currency’s slide. Dealers said the buying was intended to allow for a gradual decline rather than a bid to stop its fall.

“Most people at this point expect the dollar to move lower,” said one dealer. “There are an awful lot of short positions out there.”

There has been a growing conviction in the market that the leading industrial countries, the G-7, were letting the dollar fall rather than trying to keep it within certain target ranges. G-7 members are the United States, Japan, Great Britain, West Germany, Canada, France and Italy.

The G-7 agreed as part of the Louvre Accord to intervene in the market to keep the currency within certain ranges.

But with the U.S. trade gap stubbornly high, economists say the currency must fall further. A lower dollar makes U.S. goods more competitive on world markets and makes imports more expensive in the United States.

“Over-ambitious commitments to peg certain exchange rate levels or target zones run the risk not only of clashing with domestic monetary objectives but of collapsing when the markets test them,” Karl Otto Poehl, the head of the West German central bank, said in a New York speech Monday, the text of which was released in advance.

Hans Meyer, the third-ranking officer in the Swiss National Bank who is responsible for foreign exchange, said in a radio interview that recent dollar purchases by the central bank had been intended to smooth the dollar’s fall, not reverse it.

James O’Neill, a vice president and financial markets economist at Marine Midland Bank, said the traders were disappointed that Poehl did not indicate that West Germany is willing to cut its interest rates. “It was believed that the dollar would get some support if they did cut their rates,” he said.

Others focused on what Poehl’s comments implied for central bank intervention.

“He’s saying that the central banks alone can’t support the dollar forever,” said Robert Ryan, a senior trader at Irving Trust Co. “That’s something everyone knows.”

Still, Ryan said traders used the comments as an excuse to sell. “The mood was already set, but (Poehl) gave the impetus,” he said.

Further weighing on the dollar are doubts over the ability of White House and congressional negotiators to make substantial progress in trimming the U.S. budget deficit. So far, an agreement to cut the defict has eluded negotiators.

The market’s bearish mood toward the dollar has prompted predictions of further declines for the dollar. “A lot of people are talking 1.65 marks this week,” said Carol Callanan of Credit Lyonnais.

In Tokyo, where trading ends before Europe’s business day begins, the dollar fell nearly one yen against the Japanese currency despite heavy central bank intervention.

The dollar closed at 137.58 yen, down from Friday’s close of 138.55 yen. Later in London, it was selling at 137.02. In New York, the dollar plunged further to 136.98 yen from 138.35 yen Friday.

In London, the British pound rose to $1.7335 from $1.7225 on Friday. In New York, it cost $1.7400 to buy one pound, sharply more expensive than the $1.7225 it cost Friday.

All French banks and markets were closed for a holiday Monday. Elsewhere in Europe, the dollar was trading at 5.8295 French francs, down from 5.8730.

Other late dollar rates in New York included: 1.7113 West German marks, down from 1.7285; 1.4138 Swiss francs, down from 1.4283; 5.8075 French francs, down from 5.8785; 1,260.50 Italian lire, down from 1,275.00, and 1.3142 Canadian dollars, down from 1.3158.

Other late dollar rates in Europe included: 1.7125 West German marks, down from 1.7280; 1.4195 Swiss francs, down from 1.4270; 1.9325 Dutch guilders, down from 1.9435; 1,264.50 Italian lire, down from 1,272.25, and 1.3134 Canadian dollars, down from 1.3173.

Gold prices rose. Republic National Bank in New York reported a late bid for gold of $469.80 an ounce, up from Friday’s late bid of $469 an ounce.

Gold closed at $470.10 an ounce on the New York Commodity Exchange, up from $468.80 on Friday.

In London gold rose to a late bid price of $470 an ounce from $467.25 late Friday. In Zurich, the precious metal closed at a bid price of $470, up 50 cents from Friday’s close. Earlier in Hong Kong, gold rose $3.68 to close at a bid price of $470.68.

Silver closed at $6.925 an ounce on New York’s Comex, down from $6.950 on Friday. Earlier in London, silver was quoted at a late bid price of $6.99 an ounce, down from Friday’s late bid of $7.025.

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