Central Banks’ Selling Fails to Dampen Dollar
The dollar closed higher Monday, defying the weight of coordinated intervention in the market by 10 central banks to beat the currency down.
Traders said high U.S. interest rates, and the prospect that increased inflationary pressure will push them up more, made the dollar an attractive currency.
The Federal Reserve, the Bank of Canada, the West German Bundesbank and seven other European central banks all sold dollars in the market in a bid to push it down against the West German mark. But dealers said the repeated intervention, including three rounds of selling by the Fed, would only slow rather than stop the dollar’s rise.
“The only thing capping the dollar right now is the intervention,” said Ian Spence of Manufacturers Hanover Trust Co.
“We will probably test the highs again with enthusiasm because fundamentals favor the dollar right now,” he said.
The dollar gained over the weekend in the Far East and continued to move higher when trading shifted to Europe.
After rising to a quoted high of 1.9230 marks, the dollar closed in New York at 1.9086 marks, still sharply higher than its close Friday of 1.8965.
Higher Interest Rates
The dollar peaked even after the Fed and Bundesbank were joined in their dollar-selling effort by the central banks of Switzerland, the Netherlands, Austria, Belgium, France, Italy and Britain.
West Germany, France, Austria, Switzerland and Belgium confirmed that they had sold dollars in the open market. The other selling was reported by traders.
As in recent weeks, the Japanese yen was out of the spotlight, closing unchanged at 133.65.
The Federal Reserve has been pushing up interest rates in recent weeks, including raising its discount rate to 6.5%, because it sees clearer signs of inflation. This makes the dollar more attractive but makes stocks less favorable investments.
“It’s the same old story,” said Eckhart Hager, currency analyst at Chase Bank AG in Frankfurt. “We have a booming (U.S.) economy, which means higher inflation, which means higher interest rates.”
Traders expect that the consumer price index, the most widely watched measure of inflation, will show a strong 0.4% rise for July. The figure is to be released by the Labor Department today.
The dollar’s rise came even though some traders think the central banks are becoming more serious about stopping the currency’s increase in value.
“The second round of intervention made people think there’s a little more than a smoothing of the dollar’s rise going on here,” said Gary Thayer, financial futures analyst for A. G. Edwards & Sons.
But other traders said the central banks are really after a slowdown in the dollar’s rise rather than a reversal.
“I don’t think we’ve seen any heavy artillery like we did at the end of the year,” when central banks intervened strongly to halt a sharp dollar selloff, said a dealer at a U.S. bank.
West Germany is known to be especially concerned that the weaker mark will make imported goods more expensive and push up its inflation.
Steady in London
The pound fell sharply Monday against the dollar. One dealer cited disappointment that an expected increase in British interest rates didn’t materialize.
In London it cost $1.6767 to buy one pound, cheaper than $1.7025 late Friday. In New York it cost $1.6860 to buy one pound, less expensive than late Friday’s $1.6987.
Other late dollar rates in New York, compared to late Friday, included: 1.6075 Swiss francs, up from 1.5954; 6.4680 French francs, up from 6.4193; 1,412.00 Italian lire, up from 1,405.00, and 1.2285 Canadian dollars, down from 1.2301.
Late dollar rates in Europe, compared to late Friday: 1.9190 West German marks, up from 1.8925; 1.6105 Swiss francs, up from 1.5915; 6.5050 French francs, up from 6.4125; 2.1605 Dutch guilders, up from 2.1390; 1,417.00 Italian lire, up from 1,405.50, and 1.2291 Canadian dollars, up from 1.2271.
Gold for current delivery on the New York Commodity Exchange rose to $433.60 an ounce from $431.70 late Friday.
Gold held steady in London, finishing at a late bid price of $432 an ounce, unchanged from Friday’s late bid. In Zurich, gold fell to a closing bid of $431 an ounce, compared with $432.50 late Friday. Earlier in Hong Kong, gold fell $1.61 to close at a bid $432.01 an ounce, compared to Saturday’s $433.62.
Silver prices also were mixed. On New York’s Comex, silver for current delivery rose to $6.730 an ounce, from $6.657 late Friday. Silver bullion prices fell in London, where the metal was trading at a late bid price of $6.64 an ounce, compared to Friday’s $6.68.
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