CURRENCY : Dollar Sinks in Reaction to Dip in Crude Prices

The dollar fell sharply Friday as plunging oil prices unleashed trader fears that interest rates will fall in the United States.

Gold prices also fell as cheaper oil raised the prospect of lower inflation. Gold, traditionally bought as a hedge against inflation, was quoted at $394 an ounce at Republic National Bank in New York at 4 p.m. EDT, down from $396.50 late Thursday.

Oil prices are a barometer of inflation. Lower inflation usually leads to lower interest rates, which is a bearish sign for the dollar.

Overseas, dealers also attributed the dollar’s slide to comments about the U.S. currency by Federal Reserve Board Governor Martha Seger. She said a sharp rise in the dollar would put the brakes on U.S. economic expansion.

Her comments caught foreign exchange markets by surprise and spurred a dollar selloff late in the European trading day.

In Tokyo, where trading ends before Europe’s business day begins, the dollar fell 0.05 Japanese yen to a closing 134.30 yen. Later, in London, it was quoted at 134.40 yen, and in New York, it slumped to 133.75 yen from late Thursday’s 134.37.

Late dollar rates in New York, compared to late Thursday’s rates, included: 133.75 Japanese yen, up from 134.37; 1.8690 West German marks, down from 1.88265; 1.5830 Swiss francs, down from 1.59425; 6.3595 French francs, down from 6.4065; 1,393.50 Italian lire, down from 1,402.25, and 1.21675 Canadian dollars, down from 1.21825. The British pound climbed to $1.6935 from $1.6810 late Thursday.

On the Commodity Exchange in New York, gold fell to $394.40 an ounce from late Thursday’s $396.80.