Central banks prop up dollar

BY DIANE COYLE

Economics Correspondent

Central banks stepped into the currency markets to prop up the dollar yesterday. Aggressive intervention by the Federal Reserve, Bank of Japan and Bundesbank, among others, helped the currency reverse direction.

The substantial purchases of dollars by the central banks - estimated at up to $2bn - took foreign exchange markets by surprise. After the dollar's steep fall at the end of last week many dealers had "short" positions, having sold dollars they had not yet bought. The intervention was a sharp reminder to traders that currencies can go up as well as down.

Robert Rubin, the US Treasury Secretary, said the US would continue to co-operate with other countries in line with the Group of Seven's objective of reversing some of the dollar's startling decline against the yen and Deutschmark this year.

Neil Mackinnon, chief currency strategist at Citibank, said: "This is a message to the markets that central bank intervention is alive and kicking ahead of the G7 summit." The summit of heads of state and finance ministers will be in Halifax, Nova Scotia, on 15-17 June.

However, analysts said yesterday's action had only a limited effect. The dollar rose by 3 pfennigs and just over 2 yen, taking it above DM1.41 and, briefly, 85. Julian Jessop, an international economist at HSBC Markets, said: "The exchange rate has not really moved all that much. It would have been more effective if the dollar had already started moving of its own accord." Citibank's Mr Mackinnon added that any central bank intervention would be unsuccessful unless followed by changes in interest rates.

The currency markets are hanging on the outcome of today's meeting of the Bundesbank Council. Many analysts think there is a chance of a cut in German interest rates, although Richard Reid at UBS in Frankfurt doubted the Bundesbank would cut rates again soon.

The prospect of higher US interest rates retreated yesterday following figures that showed gross domestic product growth in the first quarter was slightly lower than originally estimated. The annual growth rate was revised to 2.7 per cent, following 5.1 per cent in the final quarter of 1994.

The dollar's gains yesterday helped the pound. It climbed to DM2.2530, nearly three pfennigs higher than the previous close. The effective exchange rate index rose to 84.3. The pound rose slightly against the dollar to $1.5888. Traders said the Bank of England had also intervened to support the dollar.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee