Bearish sentiment towards the dollar persisted following last weekend's Group of Seven decision to ignore the latest slide in the US currency.
The dollar sank at one stage to Y96.45 - a new postwar record - and dropped to a 20-month low of DM1.5190, reflecting aggressive sales in New York.
It closed in London nearly two pfennigs lower at DM1.5180 and 0.6 yen down at Y96.72. The falling dollar continued to drag down the pound, which finished at DM2.3917, a fall of 1.45 pfennigs on the day.
Despite worries that central banks might use the excuse of volatile markets to intervene, predictions abounded that the dollar would plumb further record lows. Sentiment was weighed down by the feeling that the Clinton administration wanted a lower dollar. Ron Brown, the US Commerce Secretary, added to the bearish mood when he said that a rise in US rates would be 'inappropriate'.
Some compared the decline to 1977, when President Jimmy Carter urged a lower dollar to narrow the current account deficit. 'If you compare this to the Carter crisis, you can be as bearish as you like,' said David Cocker, currency economist at Chemical Bank. 'Then the dollar fell 25 per cent against the mark and 30 per cent against the yen. And on that basis, the dollar could fall to Y85 and DM1.35.' Rumours swirled that the Bank of Japan might cut its official discount rate, now 1.75 per cent, if the dollar drops below Y95.
In spite of such predictions, there was little sense of crisis in the markets. Neil McKinnon, chief economist at Citibank, said it was appropriate 'to let the market find the right level for the dollar'.
Hopes that short-term US rates would rise and underpin the US currency suffered a setback after US producer prices were unchanged last month and flat over the year to June. The news surprised the markets. Excluding volatile food and energy prices, the producer price index edged down 0.1 per cent to stand 0.6 per cent higher than a year earlier.
But US analysts expressed doubts that the good news would last. Higher crude oil prices, which yesterday surged above dollars 18 a barrel for the first time in 13 months on news of a strike by Nigerian oil workers, have yet to feed through.
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