FINANCIAL MARKETS : CURRENCY : Dollar Dives After Broad Selloffs by European Banks

Just when the market thought the time was ripe to buy dollars, a group of European central banks launched a surprise attack on the dollar Thursday that sent the U.S. currency tumbling around the world.

West Germany’s Bundesbank, accompanied by the Bank of England and the Swiss national bank, caught dealers by surprise when they began selling dollars during European trading hours.

The moves “scared a lot of people,” said Pat Magill, chief corporate dealer at Daiwa Bank Ltd. in London.

The dollar’s biggest drop came against the West German mark. The U.S. currency touched levels against the mark not seen in about 19 months. When trading concluded in New York, the currency had lost about 4 pfennigs, falling to 1.6800 marks, its lowest level since May 11, 1988, when it finished at 1.6773 marks.

“The dollar got hammered, really destroyed,” said Scott Horwitz, a vice president at the Bank of Boston’s New York office. “People got really nervous, and it compounded itself in the afternoon with more sell orders.”

Traders were shocked by the speed with which the dollar declined. The dollar had been gaining strength since last week, but “it was not that huge of a rally . . . the dollar was not all that high. People weren’t really looking” for any intervention to push it lower, said Jim Chorek, an analyst with Money Market Services International in Chicago.

Volume was heavy. Chorek said rumors that the Federal Reserve was monitoring dollar rates “really nailed (the dollar) again.” Traders could not determine whether the Fed actually had entered the market to sell dollars.

The dollar declined sharply against all major currencies except the Canadian dollar. Chorek said breaking the 1.6750-mark level during the day was “a real bad sign” and predicted the dollar could fall as low as 1.5600 marks.

Traders speculated the Bundesbank intervened because it was disappointed with the mark’s recent, relative weakness.

The tumultuous activity stole attention from any anticipation of Friday’s release of unemployment data for December. “People are just squaring whatever damage is done and calling it a day,” Horwitz said.

In New York, the dollar closed at 143.65 yen, down sharply from 145.25 yen on Wednesday. The dollar fell in London to 143.30 yen.

Earlier in Tokyo, the dollar rose to a closing 145.20 Japanese yen, from 143.40 yen at Friday’s finish. A prolonged New Year’s holiday closed Japanese markets earlier in the week.

In London, the British pound rose to $1.6290, from $1.6080 late Wednesday. In New York, it cost $1.6350 to buy one pound, more expensive than Wednesday’s $1.6115.

Gold prices were mixed. On the Commodity Exchange in New York, gold bullion for current delivery settled at $398.60 an ounce, up $4.60 from Wednesday. Republic National Bank in New York quoted a late bid for gold at $398.75 an ounce, up $4.40.