CURRENCY : Fed Action Pushes Dollar Sharply Higher; Gold Off

The dollar surged above 1.92 West German marks, its highest level in 19 months, after the Federal Reserve boosted its discount rate on Tuesday, widening the gap between U.S. and foreign short-term interest rates.

The dollar also advanced strongly against most other currencies on domestic and foreign markets Tuesday after the Federal Reserve surprised traders by increasing its discount rate.

Gold prices fell. Republic National Bank of New York quoted a bid of $426.90 an ounce as of 4 p.m. EDT, down from $430.20 late Monday.

Foreign exchange dealers said none of the major central banks intervened Tuesday to slow the currency’s rise, in contrast to their steady intervention in recent sessions.

The half-point increase in the Fed’s discount rate to 6.5% is likely to spur demand for dollars by making dollar-denominated assets more attractive, economists said.

The dollar, fueled by strength in the U.S. economy and expectations of further U.S. interest-rate increases, has gained steadily against major currencies since hitting post-World War II lows in January.

“Raising rates in the face of a strong dollar probably was not expected,” said Rick Gomes, a vice president at Irving Trust Co.

Foreign Hikes Rumored

Traders had not expected the Fed to increase the discount rate, the fee the central bank charges for short-term loans to member banks, because the dollar has been strong, Gomes said.

Investors bought the dollar because higher interest rates make it more valuable.

Gomes said it was possible the major industrial countries known as the Group of Seven--the United States is one--were putting their monetary policies ahead of their currencies. Gomes said there were rumors in the market that West Germany, Japan and other G-7 countries might follow the Fed’s lead and increase their own interest rates.

But Earl I. Johnson, a vice president at Harris Trust & Co. in Chicago, said foreign interest rate hikes would not stop the dollar’s upswing.

“The only thing to put a cap on the dollar would be central bank selling,” he said.

Johnson called the Fed move confirmation of the economy’s strength.

The increase, which took effect immediately, was the first change in the rate since Sept. 4 and put the rate at its highest in more than two years.

Silver Slips

An increase in the discount rate is the central bank’s most direct way of pushing interest rates higher as a curb on economic growth. Economists have been concerned in recent months that continuing economic growth could spark a new round of inflation, partly because of the country’s low unemployment, high production levels and the Midwestern drought.

In Tokyo, before the Fed announcement, the dollar fell 0.39 Japanese yen to a closing 133.58 yen. In late London trading, after news of the discount rate hike, the dollar rose to 134.25 yen and in New York, it climbed to 135.15 yen from 133.725 yen late Monday.

In London, the British pound fell sharply against the dollar. It cost $1.6830 to buy one pound, cheaper than $1.7022 late Monday. Sterling also dropped against the dollar in New York, closing at $1.6840, compared to late Monday’s $1.7005.

Other late dollar rates in New York, compared to late Monday’s prices, included: 1.9204 West German marks, up from 1.90005; 1.6065 Swiss francs, up from 1.5883; 6.4710 French francs, up from 6.4115; 1,413.475 Italian lire, up from 1,402.00; and 1.2160 Canadian dollars, up from 1.2110.

Other late dollar rates in Europe, compared to late Monday’s rates, included: 1.5960 Swiss francs, up from 1.5857; 6.4325 French francs, up from 6.3950; 2.1570 Dutch guilders, up from 2.1435; 1,403.50 Italian lire, up from 1,399.50; and 1.2137 Canadian dollars, up from 1.2097.

Gold prices fell under increased selling pressure after the discount rate rise attracted investors away from bullion.

In London, gold dropped to a late bid of $426 an ounce, compared to $432.25 bid late Monday. In Zurich, gold closed at a bid $426 an ounce, compared to $432 bid late Monday.

Earlier, in Hong Kong, gold fell $3.39 to close at a bid $430.61 an ounce.

In New York, gold fell on the Commodity Exchange to $427.40 an ounce, down from $430.40 late Monday.

Silver slipped in London to a late bid of $6.60 an ounce, down from $6.78 late Monday. On New York’s Comex, silver fell to $6.630 an ounce from late Monday’s $6.675.

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