CURRENCY : Dollar Falls; U.S. Budget Deficit and Trade Gap Cited

The dollar slipped lower Thursday as pessimism about the U.S. budget and trade deficits weighed on the foreign exchange markets.

Gold prices moved higher. Republic National Bank of New York quoted a late bid of $390.70 for an ounce of gold, up from $386.40 late Wednesday.

Analysts said the dollar declined as traders became convinced the Bush Administration had no firm plan to deal with the budget and trade gaps.

Interest rates have continued to edge higher, which should support the dollar, “but we still have twin deficits and no resolution on that,” said Dan Holland, an analyst at Discount Corp.

Holland said traders also were concerned that the Federal Reserve might be cautious in raising interest rates so as not to burden the struggling savings and loan industry.

Traders see Washington as placing a relatively low priority on supporting the dollar, said Holland, who predicted that the U.S. currency could return to the levels where it traded before the November election.

Prime Rates Raised

Overseas dealers said the dollar was driven lower by skepticism that U.S. interest rates will rise, and by the West German mark’s strength. The mark, in turn, was helped by continuing speculation that a hike in official West German interest rates would materialize soon.

After the close of trading in New York, two major banks announced that they were raising their prime lending rate half a percentage point to 11.5%, the second increase in two weeks. However, prime rate hikes tend to follow, and not portend, increases in other interest rates.

The dollar began its day in Tokyo, falling 0.33 Japanese yen to a closing 126.29 yen. Later, in London, it fell further to 126.15 yen, and in New York, it slipped to 126.175 yen from late Wednesday’s 126.525.

In London, the dollar fell against the British pound. It cost $1.7595 to buy one pound, more expensive than $1.7465 late Wednesday. In later New York trading, the pound rose to $1.7605 from late Wednesday’s $1.7470.

Other late dollar rates in New York, compared to late Wednesday’s prices, included: 1.82175 West German marks, down from 1.83425; 1.5505 Swiss francs, down from 1.56575; 6.2160 French francs, down from 6.2555; 1,342.50 Italian lire, down from 1,349.75, and 1.19485 Canadian dollars, down from 1.19985.

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