The dollar rallied sharply early Thursday in reaction to favorable U.S. trade figures, but gave back part of its gains in later trading amid renewed pessimism on the U.S. budget deficit.
News that the trade deficit narrowed in September from an unexpectedly large August number propelled the dollar to a high of about 136.50 Japanese yen in New York trading. But news of a stalemate on the budget negotiations between Congress and the White House pushed the greenback down to about 135.835 yen, still up from Wednesday's 135.05 and Tuesday's 134.55.
The dollar's inability to sustain its rally Thursday despite good trade news illustrates widespread pessimism on the dollar's prospects in the aftermath of the Oct. 19 stock market crash, analysts said. The dollar recently set new post-war lows of 1.6475 West German marks and 133.13 yen following Reagan Administration statements that it would tolerate a weaker dollar in exchange for lower interest rates needed to prevent a recession.
"The view (of foreigners) of the U.S. economy is one of weakness following the stock market crash," said Bob Bannon, money-market economist with Security Pacific National Bank.
The dollar's inability to sustain the rally also showed that the trade deficit is only part of the problem clouding the dollar, analysts said. Significant agreements to reduce the U.S. budget deficit must also occur for the dollar to sustain a rally, they said.
"That (the budget deficit) is what everybody's focusing on now," said Deborah Allen Olivier, president of the Claremont Economics Institute.
"Unless Congress and the Administration get their act together, the short-term outlook is not very good," said David Wyss, chief financial economist for Data Resources. "But even if they do get their act together, the dollar is going to drop more anyway."
Wyss predicted that the dollar would drop to 125 yen a year from now if significant budget deficit reductions are made, and 110 yen if not.
The dollar rose in overseas trading in Tokyo and London and in early trading in New York Thursday on news from the Commerce Department that the U.S. trade deficit narrowed to $14.08 billion in September, down from the unexpectedly large $15.68 billion deficit in September that helped trigger the Oct. 19 stock market crash.
That news also triggered a strong rally in the U.S. stock market, with the Dow Jones industrial average climbing 61.01 points to 1,960.21, its seventh-best single-day point gain ever.
However, the deficit figures had only a temporary effect, partly because they were only marginally below expectations. Most economists had been predicting the number would come in between $14 billion and $15 billion.
Also, analysts expressed concern that, even with the September improvement, the trade deficit still remains quite high, and could go higher temporarily in the next few months because of the recent sharp decline in the dollar.
Hurt by Stalemate
That is because the latest drop in the dollar--which makes imports more expensive and U.S. exports cheaper--will lead first to higher prices of imports before it increases the volume of U.S. exports. That will temporarily widen the trade deficit, through what economists call the "J-curve" effect.
Economist Olivier said this temporary increase in the trade deficit could be reflected in the figures for November and December. Depending on the mood of the currency markets then, such news could depress the dollar even further when announced, she suggested.
"This (September deficit figure) just buys us a couple of months," Olivier said.
Further hurting the dollar Thursday was news that negotiators from Congress and the Reagan Administration reached a stalemate in talks on a plan to cut $30 billion from the U.S. budget deficit for the current fiscal year. Both sides apparently were unable to agree on specific tax increases and spending cuts.
"That undid a lot of the good" from the news of the lower trade deficit, said Wyss of Data Resources.
Wyss expressed concern that further declines in the dollar could prompt foreigners to pull money out of U.S. Treasury securities, which help finance the budget deficit. That could force bond yields and other interest rates up, risking a recession anyway.
Wyss said the dollar could be helped if foreign central banks cut their interest rates further. That would stimulate their economies to buy more goods from the United States and elsewhere, helping to reduce the U.S. trade deficit. Lower interest rates abroad also would make the dollar more attractive as an investment, Wyss said.
However, such cuts by foreign central banks are unlikely until there are significant cuts in the U.S. budget deficit, Wyss said.
Late dollar rates in New York, compared to late Wednesday's rates, included: 1.6885 West German marks, up from 1.6765; 1.38925 Swiss francs, up from 1.3755; 1.31825 Canadian dollars, up from 1.3170; 5.7215 French francs, up from 5.6650, and 1,244.00 Italian lire, up from 1,226.50.
Meanwhile, precious metals prices rose. Gold for current delivery rose to $463.50 an ounce on the New York Commodity Exchange, from $461.90 at Wednesday's close. Silver for current delivery rose to $6.624 an ounce from $6.547 on the Comex.