NEW YORK -- The dollar plunged against world currencies yesterday, touching a new low against the German mark on investors' expectations that a federal budget agreement would drive interest rates lower.
The dollar hit a low of 1.5300 marks in morning New York trading before a modest recovery carried it to a close of 1.5330 marks. The currency closed Wednesday at 1.5425 marks.
Currency traders think that adoption of the $500 billion deficit-cutting agreement would send an immediate signal to the Federal Reserve Board that easing interest rates wouldn't risk a rise in inflation because as rates fell, international investors would be less attracted to dollar-denominated investments.
Traders said the dollar probably would weaken further if the budget plan fell apart, which many said would weaken world confidence in the U.S. economy and drive investors to other currencies.
The House rejected the pact early this morning.
If failure of the plan forced the severe budget cuts mandated by the Gramm-Rudman Act, it also would probably bring lower rates and a weaker dollar, they noted.
"It's a no-win situation for the dollar," said David Gilmore, senior currency analyst with the investment research firm McCarthy Crisanti Maffei in New York. "Either way, we're heading down."
The dollar was also weak against the Japanese yen yesterday, touching a 17-month low. It ended at 133.70 yen in New York trading, down from 136.05 on Wednesday.
The dollar has been declining sharply since the onset of the Persian Gulf crisis drove oil prices up and dramatically increased the chances of a recession.
The U.S. currency has lost 16 percent of its value against the yen since its recent peak in July, and 10 percent against the mark since peaking against the German currency in August.
Investors have worried not only about the prospect of a cyclical recession but also about the threats to the federal budget posed by the savings and loan cleanup, shaky real estate markets and the growing evidence of weakness in major money-center banks.
Many economists still think the dollar's descent is beneficial overall for the economy, since it reduces the price of U.S. goods to overseas customers and thus helps stimulate U.S. manufacturing. U.S. exports remain one of the stronger parts of a languishing economy.
"We probably haven't yet reached the point where the decline is bad for us," said Kenneth Ackbarali, an economist with First Interstate Bank in Los Angeles.