The dollar came under broad speculative attack yesterday as it broke through the psychologically important 200 yen barrier in Japan and then failed to recover from its new record low.
The dollar weakened further in later trading in Europe and New York - not only against the Yen, but also against the German mark the Swiss franc, the British pound sterling and the French franc.
Reacting to the foundering dollar, gold jumped to $197.50 an ounce in London. It was the highest price for gold on the London market since December 30, 1974 during the depths of recession.
"It is a significant break to go through 200 yen and not come back," commented one currently trader here.
Despite anticipation of just such a break, the dollar has managed to hover above the 200 level for the past few weeks without going through it. In the last 10 weeks the dollar has lost about 10 percent of its value against the yen. Over the last 10 months the depreciation has been about 25 percent.
Yesterday there was talk that the dollar was now headed for a rate of 185 to 190 yen.
The latest plunge in the U.S. currency was attributed to several factors by foreign exchange traders.
On Friday, a special committee of the Organization of Petroleum Exporting Countries, headed by Kuwaiti oil minister Sheil Ali Khalifa Al-Sabah, recommended that the cartel consider a shift away from an exclusive reliance on the dollar for pricing oil and toward the use of a basket of currencies.
Such a shift could cause a tremendous move out of dollars that would severely depress the already battered U.S. currency.
Meanwhile, foreign exchange markets were also displeased by reports last Friday that the U.S. annual inflation rate in the most recent quarter exceeded 10 percent, while real growth at 7.4 percent was substantially lower than expected.
The resulting renewed attack on the dollar began in the early hours yesterday when currency trading began in Tokyo and saw the dollar come under what was described as "extreme pressure." The dollar quickly dropped through the 200 yen barrier and, despite heavy purchases of dollars by the Bank of Japan - $500 million by one estimate - it failed to recover and closed at 199.10, down from 201.25 on Friday.
When trading opened in Europe, the dollar continued to plunge, dropping to 197.70 yen, a level which it was able to sustain in New York through the afternoon.
Central bank intervention was reported in several European centers in response to the dollar's slide against a number of continental currencies.
In Europe, the dollar fell to 2.0410 Deutsche marks from 2.0525 on Friday, and to 1.7720 Swiss francs from last week's close of 1.7915.
Treasury Undersecretary Anthony M. Solomon, in testimony before the Senate Foreign Relations Economic Policy subcommittee, said he did not believe the OPEC will adopt the recommendation to switch to a basket of currencies.
He cited Saudi Arabia in this respect, saying, "There is no reason to believe" the Saudis would want to move away from a dollar-denominated oil price. Saudi Arabia is the leading producer in OPEC.
Solomon said that the U.S. opposed such a plan because it could have a short-run impact that "I think would be unfortunate."
He also predicted that the U.S. trade deficit would gradually decline during the rest of this year and next from the current $35 billion annual rate. This decrease, he said, would strengthen the dollar.
During the coming week traders will be closely monitoring the June trade figures that the U.S. and West Germany are scheduled to release.
There were some indications from Frankfurt yesterday that the German surplus will be extremely large, with some estimates that it will range between 3.5 billion and 4 billion marks, or approximately dlrs 2 billion.
A U.S. deficit of between $2 billion and $3 billion for June would be considered "neutral" plus one trader said. Anything above $3 billion however could lead to renewed dollar weakness, and below $2 billion could produce some rebound.