The dramatic recent rise of the dollar in European foreign exchange markets came to at least a temporary halt yesterday in quiet trading. The dollar declined fractionally against most major currencies, a development that was widely anticipated in view of the one-way direction of the market in recent weeks.
But in late New York trading, the dollar seemed a bit stronger, although it finished lower than on Monday against the German mark and the Swiss franc.
And in early trading today on Asian markets, the dollar surged to new highs, with dealers reporting hectic trading.
It appeared that the downward drift of the dollar in Europe was the result of profit-taking. And although there was no official confirmation, the mild retreat was encouraged by small interventions by major central banks, including--after a day's absence--the New York Federal Reserve Bank.
The banks had been pursuing a coordinated intervention policy since Aug. 1, after the Federal Reserve unilaterally entered the market on the previous Friday. It was the first effort to rein in the high-flying dollar since heads of state agreed at the Williamsburg economic summit in May to co-operate on such issues.
Despite the intervention--which has been modest from the beginning--the dollar continued to set daily records, until yesterday, against major European currencies. Even with the softer tone of yesterday's markets, the dollar still stood at extraordinarily high levels--in most cases higher than ever on any day except for Monday's prices.
Anticipation of higher West German interest rates, and the possibility that U.S. interest rate advances may be slowing down, dominated exchange markets yesterday. Bond prices here edged higher, reflecting the view of some traders that with the most recent Treasury borrowing having been absorbed, the markets may be under a bit less pressure.
Technicians also said that the growth of the widely watched M-1 money supply figure may moderate, which would also tend to ease fears of further sharp interest rate increases.
Higher West German interest rates could result if the Lombard rate--the rough equivalent of the U.S. prime rate--is raised by commercial banks. This issue could be decided after a Bundesbank meeting on Thursday. That would strengthen the mark vis-a-vis the dollar, because it would narrow the spread between the American and German interest rates structures, hence dampen the outflow of German investment money.
For all of these reasons, the dollar, which on Monday had climbed over the 2.70 D-mark level for the first time in almost 10 years, closing at 2.6975 marks, edged off to 2.686 late yesterday. There were similar fractional dollar losses against other European currencies.