Dollar dives in wake of Kohl's election triumph

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The Independent Online
THE DOLLAR touched a two- year low against the German mark in New York yesterday as currency traders reacted to Chancellor Helmut Kohl's re-election. It also fell sharply against the yen.

Analysts said the German election result was the trigger for yesterday's onslaught on the dollar. It reached DM1.4930, the lowest since 19 October 1992, before recovering slightly. It closed in New York last night at DM1.4980, down 1.93 pfennigs on the day.

The mark also rose against European currencies, particularly the French franc and Italian lira. Sterling fell to DM2.4153 from its Friday close of DM2.42.

The dollar fell below the psychologically important level of DM1.50 in mid-morning, triggering additional sales. Most analysts blamed its underlying weakness on the reluctance of the Federal Reserve Board to increase interest rates and thought the selling pressure would persist.

Chris Iggo, an economist at Chase Manhattan Bank in New York, said: 'The situation will not change until the Fed raises rates. The economy is chugging along at full capacity, and there has been no change in investors' concerns about inflation.'

The only economic statistics published in the US yesterday showed a bigger-than-expected increase in business inventories. They rose 1 per cent in August compared with 0.6 per cent the previous month. Although not usually regarded as a significant indicator by the financial markets, their surprising buoyancy added to fears about potential inflationary pressure.

Kerd Holm, currency analyst at Lehman Brothers, said: 'The market's momentum is against the dollar with so much uncertainty over interest rates. Even a 50-100 basis point increase in rates might not be enough to stabilise it.'

Traders said the volume of dealing was not as high as it had been in June and July, an earlier period of dollar weakness. There was no sense of panic in the foreign exchange market yesterday.

Most analysts thought the dollar would continue to decline against other currencies, however. Steve Barrow, currency analyst at Chemical Bank, said: 'People's tolerance is waning as we get towards the end of a difficult year.

There is an urgent need for the Fed to act.' He said if the Fed did not raise short-term interest rates by its November meeting, a few days after the 8 November Congressional elections, this would be very negative for the currency.

The pressure on the dollar also led to modest falls in US treasury bonds.

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