Responding to the Federal Reserve Board's move to squeeze credit expansion, the U.S. dollar soared more than 2 percent against most European currencies yesterday, while gold dropped another $11.50 an ounce in London to $374, which is $70 below the peak of last week's frantic boom.
Almost universally, the Fed's actions -- which included new methods of discouraging expansion of bank lending -- were welcomed as confirmation of U.S. government promises to curb inflation.
The policy had been foreshadowed in a speech last week to the International Montary Fund and World Bank sessions in Belgrade by Treasury Secretary G. William Miller.
Significantly the international financial markets took note that an increase from 11 percent to 12 percent in the Fed's discount rate had come in an unanimous vote of the Fed's board of governors -- a sharp change from the narrow 4-3 margin by which a one-half-point increase had been voted the previous week.
In the interim, wholesale prices had jumped sharply, the unemployment rate had fallen and foreign governments had put tremendous pressure on the United States to take dramatic action to shore up the dollar in international exchange markets.
The Fed. actions bolster the reputation of Federal Reserve Chairman Paul A. Volcker as "a tough guy," Washington Post correspondent Michael Getler reported from Bonn. A high official in the West German Finance Ministry said that the new measures are far more likely to restore confidence in the dollar "than simply a continued policy of intervention."
Against the West German mark -- where it had shown its principal weakness -- the dollar jumped to 1.794 marks, better than a 2 percent rise for the day. But perhaps even more significantly, the dollar was up more than 6 pfennigs over the historic low of 1.72 marks it had reached last Tuesday.
The firm, day-long trend in Germany was paralleled in Switzerland, where the dollar closed at 1.6185 Swiss francs, up from 1.5797 at the end of trading Friday.
In Tokyo, the dollar soared to a 17-month high against the Japanese yen following a major setback to the Lib- eral Democratic Party in a general election. The dollar touched a rate of 226.30 yen, the highest since last May, and closed at 225.20 after the Bank of Japan intervened to support its currency.
But like their European colleagues, Japanese financial officials praised the U.S. dollar-defense steps, which they said would increase international confidence in the dollar.
Washington Post special correspondent John Robinson noted in Brussels that the positive marked reactions reflected a belief that the new fed program actually will bite, especially in bringing order to the Euro-dollar market.
One of the measures announced by the Fed is a new 8 percent reserve requirement on borrowings by U.S. banks in the Eurodollar market. As the Fed announcement noted Saturday, this has been an easy and convenient way by which banks have acquired funds for lending in recent months.
In effect, this will raise the costs of borrowing in the Eurodollar market. Banks probably will try to pass on such increases in costs, New York Money market expert Henry Kaufman noted. But if they can't, it will squeeze down the availability of money.
In the last four weeks, there has been a veritable explosion of bank lending. Commercial bank loans increased by $4.1 billion in that period compared with an increase of only $1.3 billion in the similar four-week period of 1978.
"The United States has put its finger right on the spot this time, unlike last November," said one Brussels dealer. His reference was to the "dollar rescue package announced on Nov. 1, 1978 which raised the discount rate but which was built importantly on amassing a large supply of hard currencies for market-propping operations.
German officials were especially pleased that, in the view of finance ministry officials, the new Fed techniques were similar to those employed by Bonn during its 1974-75 inflation. "Bonn likes it when people indirectly say you were right, and officials here say it was just what Bonn was hoping Washington would do," Getler reported.
If there was one sour note, it came from Paris, where Washington Post correspondent Ronald Koven reported that a high officials said he understood the necessity of the Fed's steps, but that his satisfaction was diminished by fears it would push all international interest rates higher.