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Fed, Banks in 9 Other Countries Intervene to Check Dollar’s Rise

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From Reuters

The Federal Reserve and central banks of nine other nations launched heavy, concerted intervention today to check the rise of the resurgent dollar.

The Federal Reserve and West German Bundesbank moved aggressively to check the dollar’s new year rally after the currency closed Wednesday at 3 1/2-month highs against the West German mark and Japanese yen.

The Fed intervened three times in an unusually firm response, dealers said, and the Bundesbank raised its two key interest rates to lure investors from the U.S. currency.

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The dollar dipped to 1.8670 marks from Wednesday’s 1.8725 marks after the sell-off but continued to climb against the Japanese yen. The U.S. currency rose to 129.70 yen from 128.70 yen.

The Bundesbank said it would raise its discount rate to 4% Friday and increase its key Lombard rate, which sets a ceiling on bank-to-bank lending, to 6%.

The moves were followed by matching rate hikes by France, Switzerland, the Netherlands and Austria, the second round of European rate increases in a month. The central banks of Britain, Canada, Italy and Belgium also sold dollars.

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Dealers said the dollar ignored the rate hikes but fell after the central banks’ action, the third such coordinated round in two weeks.

The dollar responded only to such a concerted attack, dealers said, as high U.S. interest rates ()continue to underpin the currency. In addition, traders hope that President-elect Bush will soon tackle the massive U.S. budget deficit.

“There still seems to be euphoria that in tomorrow’s (inaugural) speech, Bush may say something about a big cut in the budget deficit,” said Dan Holland of Discount Corp.

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On the gold market, February gold contracts rose 80 cents, trading at $404.00 an ounce on the New York Commodity Exchange.

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