Dollar Sinks After Recent Run-Up; Rate Fears Cited

The dollar fell in nervous trading Thursday, reflecting rounds of central bank intervention and fears of interest rate hikes abroad.

Traders were not surprised by the currency’s retreat after its recent rise. “Everyone was looking for a correction phase to begin, and it’s begun,” said Jim McGroarty, a senior vice president at Greenwich Capital Markets in Greenwich, Conn.

“The question is how far (down) do we go?” he said.

Market strategists expect the dollar selling to continue as speculators protect themselves against any hike in European interest rates over the long Memorial Day weekend, which could cause the dollar to fall.

A day after British interest rates moved higher, the Swiss National Bank on Thursday announced the introduction of a flexible Lombard rate policy. Dealers said this daily adjustment of the Lombard rate, which acts as a ceiling for Swiss interest rates, was seen as a prelude to a rate increase.

The Lombard rate is what the central bank charges commercial banks for supplemental borrowings in which securities are used as collateral.

“The Swiss announcement had a psychological impact on the market after the U.K. rate rise and the continued threat of rate increases in Japan and West Germany,” said Joe Leitch, a foreign exchange director at Salomon Bros. International in London.

Little Impact Seen

The Federal Reserve, the Bank of Canada and several European central banks intervened against the dollar shortly after the government announced a downward revision in the nation’s gross national product for the first quarter to 4.3% from a 5.5% estimate.

Overall, however, “intervention hasn’t been all that effective,” said Kevin Lawrie, a vice president at the Bank of Boston. Many who are still bullish on the dollar note that it is the central bank and not investors who are doing the selling.

“We have some room to come off a little further still, but next week the dollar should resume its upward momentum,” Lawrie said.

In Tokyo, the dollar closed at 142.35 Japanese yen, down 0.65 yen from the 19-month high posted Wednesday. Later in London, the dollar fell further to 142.05 yen. In New York, the dollar finished at 141.23 yen, down from 142.78 yen on Wednesday.