Dealers declare war on the dollar: Slump to post-war low challenges central banks World stock market and bond slide gathers momentum

THE DOLLAR traded for less than 100 yen for the first time since the Second World War yesterday, as foreign exchange dealers challenged the world's central banks to step in and defend the tumbling US currency.

The dollar's slide prompted sharp falls in the US bond and stock markets. The threat of early increases in US interest rates drove the 30-year US Treasury bond down another half-point to yield more than 7.5 per cent.

The dollar's plight also sent the Dow Jones Industrial Average crashing through 3,700. Automatic selling of shares by computer programs was curbed late in the day when the Dow shed more than 50 points in increasingly heavy trading. But it recouped some of the losses to end down 33.93 at 3,707.97 by the close.

Economists said the concerted intervention to prop up the dollar was almost inevitable, with the currency trading below the level at which 17 central banks collaborated to buy dollars in May. But officials of the Federal Reserve said they were unlikely to raise interest rates to defend the currency.

Traders said it was unlikely the central banks would intervene until their chances of success improved - once short positions had accumulated or the dollar had bounced for technical reasons such as good US economic news.

The dollar dropped below Y100 as European markets thinned towards the end of the day, the point at which co-ordinated intervention becomes less likely. The US currency fell as low as Y99.85 before bouncing back above the Y100 level. The dollar's fall against the yen was mirrored against the mark.

In New York, the dollar plummeted to a closing post-war low of Y100.33.

'If the dollar heads to Y99 and looks like moving lower, then we should see intervention with all bells and whistles,' said Malcolm Barr, currency analyst at Chemical Bank. Nick Stamenkovich, of DKB International, said: 'The authorities will have to step in soon or the dollar will go into free fall.'

Lynn Browne, senior vicepresident of the Boston Fed, said the fall in the dollar might reflect concern about the rising US trade deficit rather than the possible rekindling of inflationary pressure, on which most analysts have blamed the market malaise.

The US Commerce Department said the US had a current account deficit of dollars 31.9bn in the first quarter of the year, the biggest shortfall for five years.

The trade figures reawakened long-standing fears in the currency markets that the US Treasury might be looking for a lower dollar to help wring concessions from Tokyo in the US/Japanese trade negotiations, although the Treasury always denies this.

Despite apparent consensus - even among US industrialists - that the dollar should not fall any further, the administration 'is not 100 per cent unified against a weaker dollar', said Roger Kubarych, an economist with Kaufman.

The markets ignored figures detailing Britain's trade with countries outside the European Union, which showed the visible deficit widened from pounds 493m in April to an unexpectedly high pounds 767m in May. Excluding oil and erratic items, the underlying trend appeared to be flat.

Separate figures showed UK companies spent pounds 1.1bn on foreign acquisitions in the first quarter, the lowest figure for at least seven years and the first time for three years they had been outspent by foreign predators buying UK businesses.

The weakness of the dollar threatens another grim day in world bond and stock markets. The FT-SE 100 shed 30.9 at 2,940.2.