Dollar slips as Germany holds line on interest rates

January 06, 1993|By Bloomberg Business News

NEW YORK -- The dollar retreated from Monday's highs as th Bundesbank's reluctance to ease credit put the brakes on the U.S. currency's rise.

Meanwhile, the British pound surged as investors sought shelter from the tensions within the European rate mechanism, the system that ties eight other European Community currencies.

After the dollar's swift ascent, investors have become reluctant to buy more dollars until they see evidence of the U.S. economic recovery or a greater willingness by the Bundesbank to cut German interest rates, traders said.

Even so, many investors are ready to buy the dollar whenever it dips, because they believe the quickening pace of the U.S. recovery will lift the U.S. currency later this year.

"Now the question is: Where's the bottom?" said a trader at Banque Indosuez. "After starting at 1.64 [marks], 1.62 looks pretty cheap."

In fact, investors surfaced to buy dollars as the currency retreated yesterday, and demand is likely to keep the dollar from falling below 1.61 or 1.60 marks this week, he said.

The dollar closed yesterday at 1.6262 marks, down from 1.6393 marks Monday. Monday's close was the highest since May 27.

Elsewhere, the British pound surged as investors dodged the risks of the ERM and moved their money offshore, traders said.

"The pound has really been the powerhouse today," said Keith Cheveralls, vice president at Nippon Credit Bank.

The U.K.'s withdrawal from the ERM in September has allowed (( that country to slash rates and cope with its recession, even as other ERM members have been forced to maintain high rates to protect their currencies, Mr. Cheveralls said.

The British pound finished at $1.5505, up from $1.5010, and 2.5195 marks, up from 2.4598 marks.

The Bank of France yesterday took another step toward defending the franc when it lifted its overnight lending rate to 12 percent, from 10 percent, and suspended its 5-to-10-day facility.

Yet some analysts and traders doubt whether the moves would do more than stave off a devaluation of the franc or even a breakdown of the ERM.

"The market is getting nasty," said John Nelson, chief spot dealer at ABN-Amro Bank. "As soon as the French step back, the market will run right over the franc."

In other trading, the dollar bought 124.85 Japanese yen late in New York, down from 125.35 yen.

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