Dollar Regains Lost Ground After Sharp Drop Early in Day

After dropping sharply early in the day, the dollar bounced back in volatile trading Friday and closed at just under Thursday’s levels.

The dollar was the center of a tug-of-war between central banks from around the world, which joined forces to push it lower, and traders who viewed a lower dollar as a buying opportunity.

Thin volume ahead of the long Memorial Day weekend heightened the dollar’s volatility. Most traders spent the day squaring their positions to protect themselves in the event that interest rates rose overseas when U.S. markets are closed Monday.

“Nobody wants to be exposed too much in the dollar over the weekend,” said Jack Barbanel, a senior vice president at Gruntal & Co.

In London, one dealer complained that “the market had no depth” and said many players there finished trading at midday. British markets also will be closed for a holiday Monday.

The dollar opened lower in U.S. trading on rumors that Japan was about to hike its discount rate by 0.75% and was further pressured by talk of a West German rate hike.

Traders had expected the dollar to retreat from the highs posted earlier this week. The currency smashed the 2-mark level for the first time in 2 1/2 years on Monday and finished New York trading at 2.0115 West German marks two days later, when it also surged to close at 143 Japanese yen.

But the central banks took notice of the gains. “For the first time in a long time we’ve seen coordinated central bank intervention by even the smaller countries,” Barbanel said.

Also, U.S. officials earlier this week spoke out against the dollar’s climb in an effort to stem further increases.

But when the central banks sold dollars at Friday’s lows in an attempt to depress the currency further, traders viewed it as a buying opportunity, said Stephen Flanagan, a vice president at Manufacturers Hanover Trust Co.

While the intervention may have been effective over the course of the week, Flanagan said it failed Friday. “The dollar just held at major support points,” he said.

In Tokyo, the dollar closed at 140.40 Japanese yen, down from Thursday’s close of 142.35 yen. Later in London, the dollar was quoted at 140.30 yen. In New York, the dollar fell to 141.10 yen from 141.23 yen.

In London, the British pound traded at $1.5922, up from $1.5815 late Thursday. But later in New York, sterling dipped to $1.5905 from $1.5910.