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Dollar Gains Sharply for Second Day : Heavy Purchases by Central Banks Continue; Dow Up

January 06, 1988|JONATHAN PETERSON | Times Staff Writer

The dollar continued a spirited recovery Tuesday from its historic lows of last week, as the national banks of several countries bought hundreds of millions of dollars, convincing traders that the leading industrial nations were determined to support the sagging U.S. currency.

The dramatic climb halted briefly when word spread of an ambiguous White House statement that the surging dollar appeared to be "stable," interpreted by traders as less than a clear endorsement of its rise. But the greenback resumed its comeback to close sharply higher in the United States, and the upward move continued in early trading this morning in the Far East.

Optimism in Markets

The dollar's performance spread optimism to the stock and bond markets, with the Dow Jones industrial average finishing up 16.25 points, to 2,031.50. The rise followed the Dow's 76-point gain on Monday, which also was aided by sharp gains in the dollar resulting from heavy central bank purchases. A stable dollar reduces the likelihood of inflation and makes U.S. stocks and other financial instruments appear safer to invest in.

Central banks in Japan, West Germany, the United States, Canada, Italy, Switzerland and Austria added fuel to the dollar rally with coordinated purchases of the currency, estimated to total $1.5 billion to $2 billion. Their actions had special impact because there already had been a growing sentiment among private speculators that the dollar might have reached at least a temporary floor.

"What they (the central banks) were trying to do was signal the market that this was a strong, concerted move--and that they planned to be successful at it," said Robert A. White, a vice president at First Interstate Bank Ltd. in Los Angeles. "It was a successful, well-timed move."

Gain of Five Yen

The dollar closed in New York at 127.80 Japanese yen, up nearly five yen from Monday. It finished at 1.6310 West German marks, up from 1.5885 marks on Monday. Earlier, in Tokyo--where large corporations and financial institutions have been a source of much of the recent pessimism on the dollar--the currency rose more than three yen to close at 124.80 yen. In Tokyo trading this morning, the dollar closed at 127.15 yen.

But, despite the dollar's robust performance Tuesday, its outlook remained highly uncertain in light of the financial community's deeply ingrained worries about the U.S. trade and budget deficits. There is also a perception that the Reagan Administration is not entirely committed to stopping its fall, because the lower dollar provides cost advantages to U.S. manufacturers.

A key factor propelling the dollar rally has been growing signs that the Group of Seven, comprising the leading industrial nations, was determined to protect the dollar from sinking much lower. But lingering doubts were dramatically reinforced Tuesday, when White House spokesman Marlin Fitzwater, in answer to a reporter's question, said: "We have . . . wanted stability in the dollar, and it appears stable as of today."

The seemingly innocent remark disappointed speculators, who had hoped for a stronger White House commitment to bolstering the dollar. As news of Fitzwater's comment spread, the rally stalled, and the currency lost about 1.5 yen in addition to giving ground against the mark.

"If he (Fitzwater) wanted to make a reassuring statement, he could have said, 'We have seen the lows,' " observed Michael G. Papaioannou, a foreign exchange analyst for the WEFA Group, economic consultants in Bala-Cynwyd, Pa. "When the market didn't hear such a statement, they interpreted it to mean that tomorrow we may see a lower level."

Charles A. Spence, a vice president in the foreign exchange trading area at First Interstate, said: "Everyone was buying dollars, and suddenly the White House came out with a statement that the dollar was stable--as of today. Some people even sold dollars on his statement."

Purchases Impress Traders

The second consecutive day of extraordinary visibility in the currency markets by leading central banks impressed traders, some of whom have started to wonder if the dollar's value plunged too steeply against the yen and mark at the end of last month, when the currency skidded to levels not seen since the modern Japanese and West German currencies were established after World War II.

In the short term, the purchases of dollars by those banks can be effective because they threaten speculators who are counting on a continued plunge in the currency's value. But such central bank intervention typically has only limited influence, especially if the banks are trying to push a currency in the opposite direction from that in which the market is pushing it.

"Right now, the important question is how long will this (rally) last?" Papaioannou said. "I feel that it's going to be temporary."

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