Dollar Advances Despite 2 Waves of Selling by Fed

The dollar closed higher Wednesday, digesting the effects of central bank intervention, including two rounds of dollar selling by the Federal Reserve.

“People still want the dollar,” one European bank dealer said. The dollar is favored against all other currencies, he added.

The dollar closed at 1.91 West German marks, against Tuesday’s 1.8895. It rose to 133.95 Japanese yen from 133.70 at its previous close. The British pound fell to $1.6910 from $1.7015.

Gold prices were mixed.

The prospect of rising interest rates is the key factor propelling the dollar, dealers argue. “While the (U.S.) economy maintains the present pace of expansion, interest rates will move higher,” attracting investment funds, a West German bank dealer said. “People will test 1.92 marks, but there’s a lot of resistance there,” he said.

Middle Eastern interests were buying the dollar and selling marks, dealers here said, prompting other investors to sell their yen and other foreign currencies in favor of holding dollars.

Dollar-buying by Japanese investors was relatively light compared to the amount bought on Tuesday, dealers said. The dollar was strong Tuesday despite a government report showing the U.S. trade deficit in June at a larger-than-expected $12.54 billion. The report showed a sharp rise in U.S. imports to record levels. The demand for imports carries inflationary aspects, which would be expected to lead to further interest rate increases.

Will Let Dollar Rise

Economists said last week’s discount rate rise demonstrated clearly that the Federal Reserve’s first priority is fighting inflation, not managing exchange rates.

Instead, the Fed is now willing to let the dollar rise as a byproduct of its campaign to cool inflationary pressures.

“The No. 1 goal of the Fed is to keep inflation under control,” said Steve Slifer of Lehman Government Securities Inc. “I would think that they would want to keep the dollar stable. But the dollar at this point is way down the list of priorities for the Fed.”

The Fed sold dollars at 1.9025 marks in the morning and again at 1.9140 marks in early afternoon, dealers said.

The dollar rose as high as 1.9165 marks and 134.25 yen before the intervention.

The central bank maneuver did not surprise the market as the dollar rose to levels where the Fed has often intervened in the past.

Other late dollar rates in New York, compared to late Tuesday’s rates, included: 1.6040 Swiss francs, up from 1.5872; 1.2313 Canadian dollars, up from 1.2276; 6.4660 French francs, up from 6.4035, and 1,412.50 Italian lire, up from 1,399.45.

Other late dollar rates in Europe, compared to late Tuesday’s rates, included: 1.9123 West German marks, up from 1.8705; 1.6025 Swiss francs, up from 1.5705; 6.4750 French francs, up from 6.3390; 2.1550 Dutch guilders, up from 2.1065; 1,401.50 Italian lire, up from 1,384.50, and 1.2323 Canadian dollars, up from 1.2275.

Gold Declines

In Hong Kong, gold dropped to $431.31 an ounce from $434.21.

Gold fell in London to a late bid of $428.50, compared to $431.25. In Zurich, Switzerland, gold closed at $428.50, down from $433.

On the Commodity Exchange in New York, gold bullion for current delivery rose to $431 from $428.90. Republic National Bank of New York said gold was bid at $430.40 as of 4 p.m. EDT, up from $428.80.

Silver bullion prices fell in London to a late bid of $6.62 an ounce, compared to Tuesday’s $6.77. On New York’s Comex, silver bullion for current delivery rose to $6.647 from $6.610.

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