Dollar dives after gloomy forecast

NEW YORK - The dollar slumped by more than two pfennings against the mark in New York trading, dragging down both the bond and share markets, writes Larry Black.

The sudden sell-off in the dollar, which had been sliding against European currencies all week, coincided with a prediction by the US Conference Board that the US currency could fall 10 per cent against the mark by the end of 1995, to below DM1.5. The trade group's chief economist, Gail Fosler, said the US would have to offer a real interest-rate premium over the European economies simply to keep the dollar stable, meaning yields on the 30-year US Treasury bond would have to rise by another full percentage point.

Within minutes, the dollar fell through technical support levels to DM1.609 marks, and finished the day slightly above DM1.61.

The Conference Board's prediction, with its implicit suggestion of rising inflation, also threw the bond market into a slide, with the price on the long bond falling almost a full point and the yield rising to 7.45 per cent. US share prices again declined, with the Dow Jones Industrial Average closing down 34.56 at 3776.78.

Ms Fosler said in an interview later that a fundamental shift was under way in perceptions of the relative strengths of the North American and European economies. Germany and France showed strong recovery in the first quarter, she noted, without the liquidity that low interest rates had made possible in the US.

'The greenback's strength is more myth than reality,' she said.