Banks step in to stem dollar's slide: Intervention put at dollars 5bn as international operation gets under way and fears grow over US interest rates

THE WORLD'S leading central banks yesterday mounted an aggressive defence of the dollar after it neared an all-time low against the yen and following a persistent slide against the mark.

Led by the US Federal Reserve and the Bundesbank, virtually all European central banks including the Bank of England launched one of the largest concerted dollar support operations in years.

The Bank of Japan was thought to have intervened through the Bank of Tokyo in London, and its presence in European markets was confirmed in Tokyo. Estimates of total central bank intervention ranged above dollars 5bn.

Though large by recent standards, this fell well short of record currency support operations such as the Bank of England's defence of the pound on Black Wednesday in September 1992 and international help for the dollar in the late 1980s.

Rumours swept the financial markets that the Fed, the US central bank, was poised to raise its key discount rate half a point to 3.5 per cent to rescue the dollar.

The speculation undermined world bond markets, including the gilt-edged market, which were already weakened by a smaller-than- expected cut in German rates and further indications of economic strength in the US.

Despite the scale of the intervention the dollar failed to rally significantly. Against the yen it climbed less than Y1 to a closing Y102.23 compared with a low of Y100.65 earlier this week. Many analysts speculated that the operation was triggered by central bank fears that the dollar could drop below the post- war low of Y100.35, which might lead to even deeper losses.

The dollar rallied almost three pfennigs from its low point yesterday before finishing at DM1.6625 in London, 1.68 pfennigs above Tuesday's close. This was the first decisive rise against the mark for three weeks after an unbroken decline of almost 10 pfennigs since 18 April.

But later in New York the dollar softened again, lending weight to fears that the recovery might be fleeting. The pound lost 1.25 cents to close at dollars 1.4995 but gained nearly a pfennig to DM2.4890.

Central banks stepped into the markets early yesterday afternoon after Hans Tietmeyer, the president of the Bundesbank, had warned that a sharp appreciation of the mark would be bad for the German economy, which is highly dependent on exports for recovery.

Trying to lay to rest market concern that Washington sought a lower dollar to force Japan to open its markets, Lloyd Bentsen, the US Treasury Secretary, said he opposed a further decline.

'I am concerned by recent developments in the exchange markets,' he said. 'This administration sees no advantage in an undervalued currency.' Mr Bentsen confirmed that the Group of Seven central banks had intervened together, joined by virtually every West European central bank.

But his remarks were greeted with scepticism because of US attempts to talk up the yen last year.

'They have started something and can't stop it,' said David Cocker, of Chemical Bank. 'If they want it to be long-standing they have to say they want a stronger dollar.'

Worries about yet another rise in US rates sent British markets reeling. Gilt-edged stock shed more than pounds 2 at one stage before ending a shade better and the FT-SE 100 index closed at 3,070.5, down 29.5.

Gilts were also undermined by today's local elections and recent signs of recovery, such as faster money supply growth and higher wage awards, which further doused hopes of lower rates.

US and German bonds weakened after the Bundesbank shaved its leading market rate, the securities repurchase rate, by six basis points to 5.41 per cent.

A stronger-than-predicted increase of 1.1 per cent in US March factory orders and a Fed report disclosing 'solid economic growth' in most parts of the country added to inflation fears and speculation over higher US rates.

Yesterday's intervention follows persistent support for the dollar by the Bank of Japan and an unexpected wave of Fed intervention last Friday. It comes despite a rise in US rates late last month. Analysts fear that further dollar weakness may make another early increase in US rates inevitable.

(Graph omitted)

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