CURRENCY : Dollar Up Sharply in Foreign Trading

The dollar advanced briskly Monday, extending a rally into a fourth week and hitting its best level against Japan’s yen since late November.

Oil and gold prices firmed slightly in early trading, responding to heightened tension in the Middle East after a U.S. warship shot down an Iranian airliner in the Persian Gulf.

But they slipped off the day’s highs later.

“Iran has very few options to retaliate against the United States,” said one Asian oil trader, “and nobody is worried that they might try to close the Hormuz Strait.”

Most markets in Asia and Europe were subdued because of the July 4 market holiday in the United States.

But the dollar remained in demand, reflecting continued optimism in the money markets about the U.S economy. It closed in London at 135.42 Japanese yen and 1.8290 West German marks, up from 134.83 yen and 1.8235 marks on Friday, dealers said.

It last closed above 135 yen on Nov. 24. The gain against the mark was made despite renewed dollar sales by the West German central bank. The Bundesbank fears that the stronger dollar--up about 7% in just a month--will raise prices on imported goods and stoke inflation.

News that West Germany’s current account balance-of-payments surplus jumped to 8.6 billion marks ($4.7 billion) in April from 4.7 billion marks ($2.6 billion) in March did not have much effect on the mark, though it may portend a rise in the U.S. trade deficit and weaken the dollar.

Renewing a drive against inflation, Britain raised its interest rates Monday for the fifth time since early June. Bank base lending rates are now up at 10% in an effort to throttle a credit-driven consumer spending spree. In May, the banks’ base rates were at 10-year lows of 7.5%.

The move was anticipated and had little impact in London’s financial markets. The pound eased to close at $1.6840, down from $1.7015 on Friday.

The Persian Gulf incident might have been expected to buoy weak crude oil prices and boost gold. Gold is a favored investor haven in times of tension and a hedge against inflation of the sort that higher oil prices might cause.

But North Sea Brent crude, a barometer of the world “spot” or free petroleum market, showed little lasting reaction. The September contract was trading at $14.54 a barrel in morning dealings, but in the afternoon, a cargo changed hands at $14.27, about where the price stood last Friday.

One-sixth of the non-Communist world’s oil moves through the Persian Gulf. But the market is at present oversupplied, with several members of the Organization of Petroleum Exporting Countries exceeding cartel-assigned quotas.

Gold rose above $440 an ounce in Asia on Friday, but it closed in London’s bullion market at $437.50, just 25 cents above Friday’s level.

In the stock markets, Tokyo ended with the Nikkei index barely changed at 27,360.39, although it took a 140-point fall on Saturday.

London stocks ended slightly lower on Monday. The Financial Times-Stock Exchange index of 100 blue chip shares closed down 10.2 at 1,848.0.