Cut in German rates sends dollar soaring

March 31, 1995|By New York Times News Service

FRANKFURT, Germany -- Seeking to halt a powerful surge by the German mark and a punishing fall in the American dollar, Germany's central bank cut key interest rates yesterday by up to a half percentage point.

The rate cut immediately propelled the dollar up nearly 2 percent against the mark, to end at 1.4090 marks in New York; it finished at 1.3827 Wednesday. The U.S. currency rose to 89.58 Japanese yen, up from 88.39.

The Bundesbank's move, the first since May, stunned European markets. Traders generally believed that because of fears of inflation the bank would not try to halt the mark's persistent, monthlong climb.

But analysts said the central bank feared that an overvalued mark would make German exports too expensive to compete in world markets and would risk aborting the country's economic recovery that began last year.

"You've had a drumbeat of chief executives recently getting up at their shareholders' meetings and saying that a high mark threatens their exports," said Ralf Conen, of Salomon Bros. in Frankfurt. "We have an export-led recovery, and if you're the Bundesbank you don't want to see this go down the drain because of an overvalued currency."

Stock and bond markets around Europe rallied at the news. In Germany, the DAX 30 stock index, which had closed down 0.42 at 1,918.46 before the Bundesbank's announcement, only 7.5 points above its 18-month low, surged 30.91 points in after-hours trading to end at 1,949.76, after briefly touching 1,957.50.

Other currencies also soared, after being beaten down by the mark in the last month, including the British pound, the French franc, the Canadian dollar, Spanish peseta and the Swedish krona.

Traders said the Bundesbank's action could be part of a concerted effort by Germany, Japan and the United States to bolster the dollar and bring down the overvalued mark and Japanese yen.

However, they warned that the Bundesbank's move alone would not stop the strong anti-dollar sentiment in Europe, where investors are concerned about the effects of the Mexican bailout on the dollar and the inability of Washington to reduce its budget deficit substantially.

"After a while we're headed back down again," said one American trader in Frankfurt. "I think we are seeing a long-term trend here. And a 50-basis point cut is not going to change that."

The Bundesbank cut its discount rate to 4 percent, from 4.5 percent. That is the rate charged on loans used mainly to meet German industry's liquidity needs for up to three months.

The bank cut its rate on repurchase agreements, or repos, to 4.5 percent, from 4.85 percent. That is the rate charged commercial banks for short-term borrowing.

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