The U.S. dollar sold off sharply in the world's foreign exchange markets yesterday as traders judged that the 14.49 percent oil price increase set Sunday by the oil cartel would have a serious and adverse effect on the U.S. economy.
In the single day's trading, the dollar depreciated by 1.8 percent against the German mark, 1.7 per cent against the Swiss franc, and 1.6 percent against the Japanese yen. This means that the dollar gave up anywhere from 12.5 to 20 percent of the recovery it had scored since the November 1 "dollar rescue" program.
The price of gold, traditional hedge against currency depreciation, yesterday rose to $213 an ounce in London, up $6.25 from Friday's close.
Officials here, who had expected no more than an 8 percent oil price increase over the year, did little to disguise their shock and dismay.
But Treasury officials, at the end of the day, said that the drop in the dollar was not as severe as they thought it might be when they were first appraised of the extent of the oil price increase.
Unofficially, it was learned that European central banks, and the Bank of Japan had intervened to stem the dollar decline, in accordance with their November 1 agreement with the United States. But by the time the New York market had opened several hours after the foreign markets, only a small amount of intervention by the New York Federal Reserve bank was deemed "necessary."
Over-all, reliable sources said that the total amount of dollar-propping activity was substantially less than on some of the peak days of the dollar slide prior to November 1.
Government officials attibuted the change in the cartel's mood from the time that Secretary of Treasury W. Michael Blumenthal visited the Middle East in early October mostly to the deteriorating political situation in Iran.
That caused "Iranian oil to disappear," one official said, strengthening the hand of the "hawks" among the Organization of Petroleum Exchange Countries that had demanded a 20 per cent increase.
The long, 1978 decline of the dollar, coupled with inflation in the industrial world-leading to a dip in OPEC financial reserves-contributed to the unexpected decision.
Caught by surprise, the White House issued a statement reflecting official annoyance, and asking for reconsideration-although it knows that this is highly unlikely. However, officials maintain some hope that the markets will not sustain the full measure of the price increase.
"If Iranian oil comes back, then they (OPEC) can't sustain the increase," a high official said. He added that in such a case, OPEC should drop the price, but the more likely probability was "under the table" price cutting.
Through trading last Friday, the dollar had recovered 13.5 percent against the Swiss franc, after leaving lost 38 percent; 9.2 percent against the German Mark, after having lost 26 percent; and 10.7 percent against the yen, after having lost 34 percent.
The recovery, thus, was about 35 percent of the extreme loss against the Swiss franc, 40 percent against the German mark, and 32 percent against the yen.