The dollar retreated sharply on the first trading day of 1986 Thursday, and dealers said its sharp plunge this week could delay a reduction in the Federal Reserve`s discount rate.
The dollar finished in New York at 198.75 Japanese yen and at 2.4250 West German marks. The dollar has fallen from about 2.51 marks just before Christmas.
Dealers said many believe the selling has been overdone and look for the dollar to firm next week, on a technical basis if nothing else.
One dealer said the sharp drop this week could delay a discount rate cut, noting that Fed Chairman Paul Volcker and other officials have expressed concern over the possibility of a free fall in the dollar.
Dealers said Thursday`s weakness was a continuation of the losses that began Monday and accelerated when the U.S. trade deficit figures for November were released Tuesday. The selling gained momentum Thursday, when the Fed supplied liquidity to the banking system with repurchase agreements for its own account.
”The dollar was stable in the morning, but it started lower when the Fed did the systems,” said Daniel Holland, vice president at Discount Corp. of New York. ”With Japanese and Swiss markets closed and lots of senior traders still on holiday, trading remained thin.”
Holland said the dollar remains under downward pressure from the perception that a discount rate cut is imminent and from the huge November trade deficit.
”There also is a little concern that traditional year-end demand for the dollar did not materialize the last week of 1985,” he said.
Tokyo markets will remain closed until next week. At 198.75 yen in New York, the dollar was down from 200 Tuesday.
