After a two-day respite, the U.S. dollar resumed its slide against strong currencies yesterday, while gold jumped $20.50 an ounce to close at $412 in London.
It was a day of turmoil and anxiety in which the persistent attack on the dollar itself was a factor in the panicky unloading of shares on American stock exchanges.
There was a sense of apprehension, spreading through the Paris Bourse and the London Stock Exchange as well, that even the tough new measures applied over the weekend by the Federal Reserve Board would not curtail U.S. inflation, or end the U.S. trade deficit.
"The American public is scared and has a right to be scared," said a U.S. economist of international reputation. He refused to be quoted by name because he thought that might exacerbate the situation.
Yesterday's combination of dollar weakness and strength in gold was heavily influenced by reports that a new price increase would be put into effect before the end of 1979 by the Organization of Petroleum Exporting Countries, following a 10 percent boost just announced by Kuwait and Mexico.
But more basically, traders said that the markets aren't convinced that the Federal Reserve's measures will actually work to control inflation. And in a way, market action was a vote of no confidence in the administration, despite the president's pledge to do "whateve it takes" to bring U.S. inflation down.
Meanwhile, it was learned that the U.S. Treasury may announce that it is revamping its gold sale policies to eliminate a regular quarterly sale of a fixed amount. Instead, it was reported, the Treasury would indicate that future sales would be made at its discretion -- both as to times and amounts.
Many advisers feel that the regular gold sale -- recently, 750,000 ounces -- has merely fed a speculative appetite, and that more uncertainty has to be created among large buyers.
The International Monetary Fund yesterday sold 440,000 ounces of gold at an average price of $412.78 at its regular monthly auction, compared to the last average of $333.24.
A main cause of the general financial market malaise is a disbelief "that the U.S. balance of trade, as it stands, is tenable," said one international expert. He brushed off as "hot air" U.S. Treasury predictions that the trade deficit would shrink, and that the U.S. current account (which includes services as well) would swing into a substantial surplus in 1980.
He pointed out that if receipts of $500 million in gold sales by the Treasury (counted as exports) are excluded, the trade deficit in the second quarter of this year would be $8.2 billion, or higher than the third quarter 1978 deficit that triggered last year's run on the dollar. In July, the trade deficit was $1.4 billion, rising to $2.9 billion in August.
"Let's face it," this expert said, "our trade balance is deteriorating with OPEC, and we're doing very little better with Europe and everyone else, So the market asks, 'Why can't the U.S. sell its goods as well as Germany and Japan?'"
Despite U.S. Treasury assurances that it has adequate resources with which to defend the dollar in exhange markets and speculators seem anxious to see the U.S. acquire more marks through a bond sale in West Germany. this was widely rumored during the international financial meetings last week in Belgrade. Evidently, there is some disappointment that this was not included in the Fed's weekend package of announcements.
Among other elements of uncertainty yesterday was the extent to which the Fed's action would actually work to put a squeeze on the availability of credit. The initial big slide in the New York stock market was attributed to a belief that the squeeze would be severe. The decline was influenced, as well, by a sharp drop in the bond markets.
Economist Lawrence Krause of the Brookings Institution, said in an interview that the Fed might have added to uncertainties by changing its basic method of operation, at the same time that it boosted the discount rate, and added a special reserve requirement for U.S. banks borrowing in the Eurodollar market.
He pointed out that when the Fed removed its concentrationon the Federal Funds rate (the rate at which member banks borrow short-term funds from each other), that rate on Tuesday had been allowed to run wild, fluctuating at one point up to 18 per cent.
Confusion on how the Federal Reserve's new rules would operate led senior New York Fed vice president Peter D. Sternlight to say on Tuesday: "We're still very much experimental at this atage."
Key closing prices for the dollar yesterday were 1.7848 marks, down from 1.7985 Tuesday in Frankfurt; 1,61275 Swiss francs from 1.62605 in Zurich. Later in New York, prices softened further to 1.7735 marks and 1.5975 Swiss francs. Japanese markets were closed for a national holiday.