The dollar jumped sharply Friday against the German mark as traders bought the U.S. currency to pay back risky foreign exchange loans.
The dollar bought 1.7385 marks late in New York, up sharply from 1.6940 marks late Thursday.The action was propelled by a surprise announcement from Sweden. The Scandinavian nation announced it was untying the Swedish crown from a basket of currencies, ending its nearly fixed exchange rate against the dollar.
Traders had been borrowing dollars and buying crowns to exploit higher interest rates in Sweden compared to the United States.
But once the crown was unloosened, traders feared the Swedish currency would plunge. That would leave them with expensive dollar loans that would have to be paid back with cheaper crowns.
To cover these potential losses, currency traders sold the mark - one of the world's most liquid currencies - and sent the dollar soaring as the German currency fell. Other currencies were also hurt.
"We were totally confused and there was a huge rush to buy dollars," one trader said.
"People were rushing to get out of exposure that wasn't there earlier," added Mike Faust at MMS International in Chicago.
Central banks got into the action, hoping to tame the dollar's rise by selling the U.S. currency on the open market. The German Bundesbank and the Federal Reserve both intervened.
"It was a very active and tiring day," said Pierre Yves Boulet, corporate trader at Banque Indosuez. "And the feeling is the dollar buying is not yet over."
Dealers said possibly billions of dollars will eventually be bought as a result of Sweden abandoning the crown's linkage to the basket of currencies.
Sweden said it would tie the crown to the European Currency Unit, the money of the European Community.
In the morning, the dollar rose as the U.S. trade deficit fell in March to its lowest level in almost eight years. With the deficit down, there would be less of a need for a low dollar.
Analysts said the dollar also benefited from Thursday's news that German central bank President Karl Otto Poehl will resign later this year.
The dollar rose to 138.35 Japanese yen, from 137.45 Thursday.
The British pound closed at $1.7110, against $1.7505 Thursday. The dollar rose to 1.4700 Swiss francs from 1.4370 Thursday; to 5.8885 French francs from Thursday's 5.7460 and at C$1.1495, unchanged from Thursday.