The dollar slid sharply against all the world's major currencies yesterday, hitting an 11-month low against the West German mark and indications that U.S. monetary officials had decided to let it tumble to a new support point.
Gold prices, meanwhile, continued their record-breaking sprint upward in Europe, reaching $385 an ounce -- a jump of $16 for the day -- as holders of paper currencies everywhere turned them in for the yellow metal in search of a safe investment against a bad case of economic jitters.
By the end of the day, however, the gold price had dropped to $370.95 in New York, signaling how volatile and speculative trading in the world's bullion markets has become in recent weeks.
Despite the problems of the dollar abroad, the stock market rebounded sharply in New York yesterday. Dow Jones industrials rose 17.24 points in heavy trading. (Details, Page E1.)
The rush for gold was cited as one reason for the dollar's latest troubles. But most important in explaining yesterday's sudden drop was an apparent But most important in explaining yesterday's sudden drop was an apparent change in the pattern of dollar-support policies by the U.S. Federal Reserve and other major central banks.
Foreign exchange dealers reported little effort by the United States at first to intervene in the markets when the slide began. Since last November when the Carter administration announced a massive $30 billion package to support the dollar, the Fed has intervened aggressively to keep dollar values from falling too far.
High government officials here confirmed that the administration had decided to lower its support sights and, instead of trying to hold the dollar above a rate of 1.80 West German marks, is now willing to see the dollar drop to 1.75 marks.
Investors anxiously tested for the new bottom in the market by selling their dollars. With pressure coming from all major markets, the dollar plunged 2.4 percent against the mark, closing at 1,7595 in New York. It also fell in value against Swiss francs, British pounds and Japanese yen.
U.S. officials insisted that their earlier pledge never again to let the dollar dive as it did last fall is still valid. They conveyed the feeling that they will support the dollar strongly at its lowered target.
"We are not going to permit a runaway situation or an unjustified decline," said Anthony Solomon, U.S. Treasury undersecretary for monetary affairs. Seeking to assure dollar-holders, he added that "we expect the dollar will remain basically stable" in the months ahead.
Solomon and other experts pointed out that the current decline of the dollar is not general like last year's but chiefly a dip against the West German mark, against which all other currencies also are weaker. Although the dollar has dropped against other major currencies in recent days, it remains relatively strong against all except the mark.
The main reason for this, experts say, is the continued difference in inflation rates between the two countries. In West Germany, inflation has been running at about 4 to 5 percent while the United States has tried to wrestle down a rate of 13 percent.
Government officials here said they expected the differential to narrow by the end of the year. Moreover, they say the dollar's prospects should be brightened by shrinkage in the U.S. balance of payments.
The Commerce Department reported yesterday a deficit of$965 million in the U.S. balance of payments on current accounts in the second quarter. This followed a surplus of $415 million in the first quarter. Officials attributed the second quarter drop to higher-priced foreign oil and demand for gasoline-saving automobiles, and they predicted an end-of-year deficit of around $4 billion -- still well below last year's $14 billion.
Still, the cost of maintaining a target zone for the dollar of around 1.80 West German marks was thought to be proving too costly for the United States. This reportedly was one reason officials here decided to lower the target.
In June and July alone, it is estimated that the Fed spent about $5.5 billion out of its holdings of other currencies to buy up dollars and hold them at around 1.80 marks. Were it not for this large volume of support, the dollar likely would have plunged earlier.
Some observers of the foreign exchange markets are doubtful about the U.S. government's ability to stem the dollar decline without rapid improvement in the trade balance and, especially, some erasing of inflation. Some experts were also critical of the strategy involved in the decision to support the new target zone. If that was the plan, they say, the Federal Reserve should have withdrawn support gradually rather than pull the plug as they apparently did yesterday.