Powerful Buying Wave : Dollar Soars Against Major Foreign Currencies

The dollar soared Friday against major foreign currencies in a powerful buying wave touched off by the unexpectedly high producer price index, strength in the bond market and continuing tension in the Far East.

Gold prices sank as much as $15 an ounce amid profit taking.

John McCarthy, chief dealer at the New York office of Amsterdam Rotterdam Bank, said currency dealers drove the dollar past several psychologically significant thresholds against the West German mark.

At the end of trading in New York, the dollar stood at 2.010 marks, up from 1.9725 Thursday.

A key catalyst for the buying was the Labor Department report of a 0.9% increase in the Producer Price Index in May.

The PPI figure, which exceeded economists’ estimates, revived speculation that U.S. interest rates might have to remain high for now to prevent inflation from veering out of control. High U.S. rates make returns on dollar-denominated investments attractive, which tends to encourage dollar buying.

Before the report, a belief was spreading that the Federal Reserve would soon relax its guarded credit stance and allow interest rates to recede.

Currency dealers were heartened by the credit market’s attitude toward the inflation news.

See Safe Haven

Bond traders, who normally react negatively to rising inflation, shrugged off the numbers and bought partly on the grounds that U.S. government securities offered a safe haven in a time of uncertain investment conditions in several countries.

The unrest in China has made some investors jittery about the entire Far East, while political troubles in Japan have weighed down the yen.

McCarthy said dealers bought dollars despite being wary about the possibility of central bank intervention.

No government authorities were detected buying and selling currencies in the market Friday except the Bank of Japan, which intervened during the European trading day to slow the dollar’s advance, dealers said.

The dollar began its trading day in Tokyo and rose 0.45 yen to close at 143.50 yen. Later, in London, it was quoted at 146.05 yen. And in New York the dollar rose to 146.49 from 143.25 Thursday.

Dollar Gains in London

In London, the dollar gained sharply against the British pound. It cost $1.5545 to buy one pound, cheaper than $1.5735 late Thursday. Later in New York, sterling declined further against the dollar to $1.5485 compared to $1.5773 Thursday.

Other late dollar rates in New York, compared to late Thursday’s levels, included: 1.7475 Swiss francs, up from 1.7085; 1.20145 Canadian dollars, up from 1.1973; 6.7987 French francs, up from 6.6910; and, 1,457.75 Italian lire, up from 1,435.5.

Late dollar rates in Europe, compared to Thursday’s rates were: 2.0025 Deutsche marks, up from 1.9770; 1.7402 Swiss francs, up from 1.7100; 6.7810 French francs, up from 6.7040; 2.2510 Dutch guilders, up from 2.2220; 1,450.50 Italian lire, up from 1,439.50; 1.1999 Canadian dollars, up from 1.1967.

Bullion dealers said the market reacted to the higher dollar by selling to profit on the precious metal’s gains earlier in the week.

Gold fell in London to a late bid of $363.25 an ounce, compared to $373.25 late Thursday. In Zurich, Switzerland, gold closed at a bid of $368.05, compared to $374.35 late Thursday.

Later on the Commodity Exchange in New York, gold bullion for current delivery fell to $358.10 from Thursday’s settlement of $373.50.

Republic National Bank of New York said gold was bid late at $357, down from $372.80 late Thursday.

Gold closed in Hong Kong at $372.53, down $4.08 from Wednesday’s close. Hong Kong markets were closed Thursday.

Silver bullion prices fell on the London market where the metal was trading at a late bid of $5.27, compared to Thursday’s $5.44. On New York’s Comex, silver bullion for current delivery fell to $5.162 from $5.443 Thursday.

EXCHANGE RATES FOR THE DOLLAR

Monthly figures are for last trading day of each month.

JAPAN W. GERMANY BRITAIN Period Yen to Dollar Marks to Dollar U.S. Cents to Pound November, 1988 123.20 1.7491 180.85 December, 1988 123.61 1.7563 182.58 January, 1989 127.36 1.8356 177.37 February, 1989 127.74 1.8505 175.34 March, 1989 130.55 1.8686 171.34 April, 1989 132.04 1.8697 170.08 May, 1989 137.86 1.9461 163.07 June 9, 1989 146.49 2.0100 154.85

Source: Federal Reserve Bulletin and Los Angeles Times