Dollar Rises on Interest Rate Speculation

The U.S. dollar rallied in late European trading Friday after news of a higher-than-expected January U.S. producer price index rekindled speculation of a rise in U.S. interest rates.

Gold prices fell.

The dollar initially weakened because of market disappointment that President Bush’s projected deficit for fiscal 1990 turned out to be little different from the Reagan Administration’s projection last month.

However, afternoon news that the U.S. producer price index rose 1%, far higher than an expected 0.4% rise, triggered a dollar rally.

Traders reasoned that the price rises meant the U.S. Federal Reserve bank would raise interest rates to stop inflationary pressures, and this prospect made the dollar attractive.

In Tokyo, where trading ends before Europe’s business day begins, the dollar closed sharply lower at 127.65 yen, down 1.74 yen from Thursday’s close of 129.39 yen. Later, in London, it was quoted higher at 128.15 yen.

Other late dollar rates, compared to late Thurday’s rates were: 1.8595 West German marks, up from 1.8585; 1.5778 Swiss francs, down from 1.5802; 6.3200 French francs, down from 6.3225; 2.0960 Dutch guilders, down from 2.0990; 1,353.75 Italian lire, down from 1,355.50; and, 1.1857 Canadian dollars, up from 1.1832.

In London, the British pound rose to $1.7547, compared to $1.7540 Thursday.

Gold was trading in London at a late bid price of $391 an ounce, down from $394.25 bid late Thursday.

In Zurich, the late bid price was $389.50, down from $394.25 bid late Thursday.

Earlier, in Hong Kong, gold fell 43 cents to close at a bid $395.15.