Dollar Dives Over Interest Rate Fears; Gold Prices Soar

The dollar went into a tailspin Wednesday as investors, apparently persuaded that U.S. interest rates will fall after a key Federal Reserve meeting this week, bailed out of the U.S. currency.

The decline, which traders also attributed to technical factors, for the first time in two months took the dollar into the trading ranges believed desired by the leading industrial governments.

Gold prices, meanwhile, rallied to two-month highs in reaction to the dollar’s weakness.

On the Commodity Exchange in New York, gold bullion for current delivery jumped $7.30 from late Monday to $388.40 an ounce--the highest level since late April. Republic National Bank of New York quoted an ounce of gold at $384.60, up from $377 Monday.

The domestic financial markets were closed on Tuesday in observance of the Independence Day holiday.

Currency dealers said traders were concerned that the Federal Reserve would further ease its credit policies to prevent the current economic slowdown from turning into a recession. Lower interest rates tend to erode the value of a currency.

The Fed’s Open Market Committee began a two-day meeting Wednesday, and some analysts believe that the policy-making group may soon announce a reduction in the influential discount rate, which is the interest the central bank charges on loans to member banks.

Traders in Europe, where much of the dollar decline took place, said the fall reflected expectations that the Fed will lower short-term interest rates soon.

Some also said they discerned a shift in the market’s psychology, from largely optimistic about a dollar rise to increasingly pessimistic.

“It could be a fundamental change of attitude about the dollar,” a dealer with a U.S. bank in Europe said. “If the Fed eases, it takes out the one prop that people were using as an excuse to buy dollars.”

“The markets are switching very quickly from being very bullish to very bearish,” said Jim O’Neill, international economist for Swiss Bank Corp. in London.

In the United States, the prospect of a reduction in the discount rate combined with the absence of any particularly bullish news for the dollar encouraged the dollar selloff Wednesday, dealers said.

The currency is now back within the limits the Group of Seven nations are thought to have outlined for it--between 120 and 140 on the yen, and between 1.7 and 1.9 West German marks--at a 1987 summit in Paris.

In Tokyo, where trading ends before Europe’s business day begins, the dollar fell 0.75 Japanese yen to a closing 140.20 yen. It eased further in London to 138.90 yen, and in New York to 138.40 yen, down from 141.55 Monday.

Two-Month Low

In London, the British pound rose nearly 3 cents to $1.6155, up from $1.5870 late Tuesday. Sterling bought $1.6285 in New York, up from $1.5890.

The dollar reached a two-month low against the West German mark, breaking the psychologically important 1.90-mark level, dealers said.

Other late dollar rates in New York, compared to late rates Monday, included: 1.8820 West German marks, down from 1.9217; 1.6115 Swiss francs, down from 1.6470; 1.19085 Canadian dollars, down from 1.1925; 6.3875 French francs, down from 6.5235, and 1,362.00 Italian lire, down from 1,397.50.

Late dollar rates in Europe, compared to late rates Tuesday included: 1.8907 West German marks, down from 1.9220; 1.6195 Swiss francs, down from 1.6527; 6.4125 French francs, down from 6.5375; 2.1495 Dutch guilders, down from 2.1710; 1,380.50 Italian lire, down from 1,393.50, and 1.0909 Canadian dollars, down from 1.1935.

Gold experts said the dollar’s decline made metals more attractive.

“When the market doesn’t have confidence in the U.S. dollar the next best alternative for some people is gold,” explained Frederick Demler, a metals economist for Drexel Burnham Lambert Inc.

Gold traded in London at a late bid price of $385.50 an ounce, up from $376.50 bid late Tuesday. In Zurich, Switzerland, gold rose to $384.50 an ounce from $376.50 Tuesday.

Earlier, in Hong Kong, gold rose $1.02 to close at a bid $379.33 an ounce.

Silver prices were also sharply higher.