CURRENCY : Higher Interest Rates Do the Trick--Dollar Falls

The world’s major central banks appeared Friday to have won the latest round in their battle to subdue the dollar, which closed lower against several key foreign currencies.

But just how long the victory will last remains in question, as bullish sentiment surrounding the dollar lingered.

Traders spent the day assessing a round of interest rate hikes that began Thursday in West Germany and were mimicked by a number of European countries.

The West German mark continued to draw broad strength from the rate hike, as well as from a statement by Bundesbank President Karl Otto Poehl, who said the central bank would do everything to prevent the mark from weakening.

France, Switzerland, the Netherlands and Austria followed West Germany on Thursday in raising their key interest rates, and Belgium followed on Friday.

Favor for Dollar

Although the dollar moved lower against the mark and several other major currencies, analysts said there is an underlying favorable sentiment toward the dollar. “People have been buying dollars recently on the basis of interest rate increases to come,” said Stephen Leach, a currency analyst at Chemical New York Capital Markets Group.

In Tokyo, where trading ends before Europe’s business day begins, the dollar fell Friday to a closing 133.50 Japanese yen, compared to Thursday’s 133.76. Later in London, it was quoted at 133.65 yen. And in New York, the dollar closed at 133.78 yen, up from 133.44 yen on Thursday.

Thursday’s report that Britain’s trade deficit swelled to 2.15 billion pounds in July from 1 billion pounds in the previous month continued to pummel the pound. In London, it cost $1.6910 to buy one pound, cheaper than $1.6995 late Thursday. In New York, it cost $1.6870 to buy one pound, cheaper than Thursday’s $1.6965.

In an effort to support the value of the British currency, market sources said in London, the Bank of England bought pounds on international currency markets. However, the intervention apparently was light, and many traders said they had not noticed the bank’s influence in the market.

Other late dollar rates in New York, compared to late Thursday, included: 1.8573 West German marks, down from 1.8657; 1.5681 Swiss francs, down from 1.5705; 6.3065 French francs, down from 6.3413; 1,382.00 Italian lire, down from 1,385.00, and 1.2392 Canadian dollars, up from 1.2360.

Other late dollar rates in Europe, compared to late Thursday, included: 1.8565 West German marks, down from 1.8630; 1.5655 Swiss francs, down from 1.5715; 6.3010 French francs, up from 6.2375; 2.0970 Dutch guilders, down from 2.1030; 1,380.50 Italian lire, down from 1,384.13, and 1.23725 Canadian dollars, up from 1.2342.

Gold prices eased. Republic National Bank of New York said gold was bid at $432 an ounce as of 4 p.m. EDT, down from $432.60 on Thursday. On New York’s Commodity Exchange, gold bullion for current delivery slipped to $432.10 from $432.80.

On New York’s Comex, silver bullion for current delivery fell to $6.655 an ounce, from $6.708 an ounce on Thursday. In London, the metal was trading at a late bid of $6.64, compared to $6.77.

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