London share prices dived to an 11-month low, with the FT-SE index of 100 leading stocks falling by 65.8 points to 2,876.6. This wiped more than pounds 15bn off the value of the London market, taking n the market's capitalisation since its February peak to nearly pounds 140bn.
The US Federal Reserve led the attack in mid-afternoon, joined by around 16 other central banks including the Bank of England and the Bundesbank. They used reserves of yen and marks to buy about dollars 3bn.
Dealers in New York reported a succession of dollars 10m buy orders from the central banks, with the total scale of intervention rivalling the dollars 5bn or so seen when the last rescue operation for the dollar was launched in early May.
The dollar spiked higher on the intervention, rising to around DM1.6090 against the mark and Y101.80 against the yen. But the rise was short-lived as the central banks found plenty of dealers holding dollars who were only too willing to sell. In London the dollar closed at a low for the year of DM1.5950 and Y100.7, but in New York it slipped below DM1.58 at one stage despite continued support-buying by the Fed.
Analysts described the intervention as ineffective and incompetent. Intervention is most effective when dealers hold short positions: they have sold dollars they do not own in the hope of buying them more cheaply later on. But the intervention came as no surprise, and dealers had time to square their positions to ensure they did not suffer big losses. The dollar's plight was worsened by rumours that the aggressive 'hedge funds' that helped to push the pound out of the European exchange rate mechanism were offloading the currency. The dollar slipped through Y100 on Tuesday for the first time since the Second World War, exacerbating the bearish mood in bond and equity markets stirred up over months by fear of inflation and large government borrowing.
'The Group of Seven have made a complete mess of it,' said Malcolm Barr at Chemical Bank. He added that the G7 would have to combine intervention with a clear statement that the US authorities actively wanted to push the dollar higher.
Gerard Lyons of DKB International said the intervention was inevitable, but that it merely delayed further dollar weakness. He said overseas investors would have to buy US securities for their portfolios before the dollar could stabilise, which in turn would need US asset prices to stabilise. This requires evidence that the US recovery is slowing and inflationary pressure abating, as well as further rises in US interest rates.
Once it was clear that the intervention was failing, US Treasury bonds and gilts came under attack, pulling down share prices in New York and London. Shares in London have fallen by almost 5 per cent during the past week, with dealers expecting further declines.
In New York automatic computerised selling of shares was halted once the Dow Jones average had recorded a fall of 50 points. The Dow rallied slightly and briefly, before resuming its fall to close 62.14 points down at 3,636.94, its biggest one-day fall since it lost 72 points on 30 March. The US bond market remained depressed.
Some economists said it was now inevitable the Federal Reserve would raise the Federal Funds rate by at least 50 basis points from 4 1/4 per cent at its policy committee meeting on 5 July.Reuse content