Gloom sends dollar towards record low
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Your support makes all the difference.THE DOLLAR closed below DM1.50 for the first time in nearly 17 months yesterday, amid fears that continuing gloom over the US economy could see it drop to an all-time low.
As investors moved from the dollar largely into the mark, the pound drifted towards the bottom of its putative narrow band in the European exchange rate mechanism. It closed 0.53 pfennigs lower on the day at DM2.8847, its lowest since the immediate aftermath of the general election.
The dollar had been trading around DM1.50 in the wake of last week's half-point cut in the US discount rate to 3 per cent, a 29- year low. Yesterday it slipped further on expectations that the summit of the Group of Seven leading industrial nations in Munich would issue a bland communique expressing no concern for the weakness of the US currency.
The dollar ended the day 1.37 pfennigs lower at DM1.4982, breaching the psychological barrier of DM1.50. It was last lower on 22 February 1991, after which it climbed to over DM1.80 last summer. The dollar then fell to around DM1.50 at the turn of the year, before recovering temporarily to about DM1.65 in March and April. The dollar also fell yesterday against the pound, which gained 1.38 cents to finish the day at dollars 1.9256.
Nick Stamenkovich, economist at DKB International, said the dollar would remain depressed if the US economic recovery continued to show signs of faltering. 'The key is if people see the latest interest cut as the last. If it is not, there is a downside risk that could see the dollar head towards its all- time low,' he said. The dollar's nadir was reached on 11 February 1991, when it hit DM1.4430.
The dollar enjoyed a brief respite yesterday morning after the US Treasury Secretary, Nicholas Brady, said he expected a cut in German interest rates relatively soon. The Bundesbank responded swiftly, warning that rates would not be cut until the economic conditions were right.
The dollar was little moved by a batch of mixed news on the US economy; a rise in business confidence in June and a fall in wholesale sales during May.
The pound drifted steadily lower during the day, but dealers were unwilling to push it through DM2.8840. This is the floor of the 2.25 per cent narrow band in the ERM to which the Chancellor, Norman Lamont, intends to commit sterling 'in due course'. Currently, the pound can move 6 per cent either side of its central rate of DM2.95.
The pound enjoyed natural support at that level, partly through fear that the Bank of England would intervene to keep sterling within its would-be narrow bands. 'If the Bank was intervening, it was doing it very quietly via the clearers,' said David Cocker, an economist at Chemical Bank.
(Graph omitted)
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