The dollar fell back sharply yesterday, up in the face of a $33 billion U.S. July trade deficit that was far worse than even the most pessimistic forecast. The decline wiped out most of dollar's gains of recent weeks.
The dollar had actually reached its best levels in more than a month in Tokyo and in early trading in European foreign exchange markets on the widespread anticipation that the deficit would narrow significantly.
But after the disappointing trade figures were reported yesterday, the dollar plunged. At the end of yesterday's trading in Europe the dollar was down 1.4 percent against the West German mark, 2.4 percent against the Swiss franc, 1.6 percent against the Japanese yen and 1.1 percent against the British pound sterling.
Later trading in New York stablized at about these levels.
The dollar at the end of the day was quoted at 1.98 marks compared with its high of 2.03, 189 yen compared with a high of over 194, and Swiss francs, compared with a high of 1.70.
The stock market meanwhile was hit by the dollar's tailspin and the negative trade figures, closing the day broadly lower with the Dow-Jones average of 30 industrials off 4.68 points to 880.20.
Terming the trade result "catastrophic." some foreign exchange dealers and dollar watchers said the U.S. currency would continue to weaken unless the Carter administration and the Federal Reserve Board moves quickly to introduce new measures to strengthen the dollar.
At the same time they noted that after the series of measures already announced in the last ten days - including higher domestic interest rates and increased U.S. gold sales - "there does not seem to be too much left in the bag," as one New York banker put it.
It's one thing to have left the dollar alone, then good news or bad news could have moved the dollar up or down," commented Lawrence Krause, a senior fellow with the Brookings Institution. "But the administration indicated deep concern about the dollar and said it shouldn't go down. Now if it goes in spite of U.S. efforts, it is a defeat for the administration and can become a debacle. The stakes have been raised significantly."
Speculation on possible new moves centered on further tightening of domestic monetary policy, with another increase in the discount rate, a decision to arrange a medium term borrowing of foreign exchange from the International Monetary Fund for dollar dispense purposes or an increase in the U.S. currency "swap" lines with other foreign central banks that could also be used to bolster the dollar.
Additional moves to defend the dollar by the administration yesterday were limited to statements that both the trade deficit and the deomestic inflation rate should improve in coming months, and to some moderate market intervention by the Fed.
The Fed. according to dealers, entered the currency market several times to smooth trading, but did not make a forceful effort to counter the selling that was driving the dollar down, or make a stand to defend the dollar at some specific exchange rate.
"The market remains deeply skeptical and it's quite a serious situation," one New York banker said, predicting that after the latest dollar retreat, "it will be much more difficult for the administration to convince the market of its desire and ability to take care of the dollar on internationl exchanges.