U.S. dollar drops with discount move

Press, 21 April 1986, Page 28

U.S. dollar drops with discount move

NZPA-Reuter New York

The United States dollar finished last week with heavy losses, despite staging a late afternoon rally after the Bank of Japan was rumoured to have sold a modest amount of yen in the open market.

The Federal Reserve Board’s widely expected move to cut its 7 per cent discount rate to 6.5 per cent only-fuelled selling of foreign currencies against the dollar in after-hours trading. "As the saying goes, buy the rumour, sell the fact,” said one trader.

The U.S. dollar finished at 2.2140/60 marks and 174.20/ 40 yen, compared with 2.2275/90 and 176.00/10 respectively on Thursday and 2.3050/65 and 178.40/50 at the end of the previous week.

The dollar also fell to 1.8530/60 Swiss francs from 1.8570/90 on Thursday, and 1.9250/65 at the end of last week.

Lingering bearishness about the U.S. economy and interest rates triggered scat-

tered bouts of broad-based selling during the morning and early afternoon trading, dealers said. At one point, the dollar touched a record low of 172.30 yen. However, the market adopted a markedly different tone around the middle of the afternoon as doubts surfaced that the Federal Reserve Board would in fact lower its discount rate.

Although the U.S. economy and comments by overseas officials suggested that a U.S. discount rate cut on Friday was certain, some people began to speculate that the authorities’ fear of precipitating a dollar freefall would delay the move.

This was the main reason the Federal Reserve Board chairman, Mr Paul Volcker, balked at his board of governors’ majority vote to make a unilateral cut in the discount rate to 7 per cent from 7*/ 2 per cent in late February. A cut was of course made, but only two weeks later, after Mr Volcker had managed to persuade Japan and

West Germany to agree to corresponding reductions in their discount rates.

But in the event, the U.S. discount rate was cut again on Friday, as expected, and the dollar has not and should not embark on an uncontrollable decline in the near future, dealers said.

“The U.S. is not acting on its own. This is clearly part of a co-ordinated cut in interest rates around the world,” said one trader.

Several European nations, including France and Britain have already cut leading interest rates and the Japanese Finance Minister, Mr Nobbru Takeshita, said on Friday that Japan would match any U.S. action "without delay.” The only question mark hangs over West Germany, which has made clear that it is in no hurry to lower its interest rates again. y As a result, the dollar remains highly vulnerable to further declines against the mark but most dealers expect it to stabilise somewhat against the yen.