Trade Gap Falls 25%; Dollar Up : Currency Rises on Worldwide Buying Frenzy

NEW YORK — Currency traders around the world erupted into a dollar-buying frenzy within seconds of the announcement Friday that November’s trade deficit was smaller than expected, pushing the U.S. currency sharply higher after the eerie lull of the last week.

“The market was paralyzed until today,” said Mickey Levy, chief economist at Fidelity Bank in Philadelphia. With Friday’s signal to investors on which way to move, he said, “the psychological impact is much greater than the economic impact.”

The lower trade deficit--down to $13.2 billion in November from October’s record $17.6 billion, nearly double the reduction that most analysts had expected--appeared to vindicate Federal Reserve officials and other central bankers who had taken a big risk in recent weeks by buying dollars in massive quantities to prop up the currency’s value.

Banks Avoided Losses

“The central banks got their wish” and avoided losses, said Marc Cohen, a vice president and manager of corporate foreign exchange for Republic National Bank of New York.

Many analysts now expect the dollar, which had declined sharply since October, to hold relatively steady or move up a bit for at least the next few months, although many also expect the dollar ultimately to fall back below current levels.

“This is good news for everybody: the Administration, the Fed, central banks around the world, investors everywhere,” said Jay Goldinger, an investment counselor at Cantor, Fitzgerald & Co. of Los Angeles. “It’s a real breath of fresh air.”

In the electronic markets that link currency traders throughout the world, the dollar surged as soon as the trade deficit was disclosed. “It’s like a dam has burst,” Nigel Green, assistant foreign exchange director at EBC Anro Bank in London, told the Dow Jones news service.

The dollar moved up so fast at the outset that many traders could not keep up with the changes. “It’s very, very volatile,” said Goldinger, who was at his office at 5:30 a.m. in California. “ . . . I can barely trade in it.”

The Federal Reserve Board’s index measuring the value of the dollar against 10 other currencies increased sharply to 90.66, up 2.38 points, or 2.7%, from Thursday’s 88.28. A year ago the index was 100.52.

Up More Than Four Yen

Against the Japanese yen, the jump was even higher, closing at 130.80 yen in New York trading, up more than four yen from late Thursday. In addition, the dollar advanced to 1.6815 West German marks, up from 1.63 late Thursday.

“It only took a moment for the mood in the foreign exchange market to change from despair to euphoria,” said John Paulus, chief economist at the investment firm of Morgan Stanley.

Although he expects the dollar to stabilize for the next few months, Paulus said that he still thinks it will fall as low as 110 yen by the end of the year.

“After a while,” he said, “people are going to realize that monthly deficits of $12 billion to $13 billion are not nirvana.”

And C. Fred Bergsten, director of the Institute for International Economics in Washington, said that it is “way too early to say whether this indicates a turn in the dollar. It’s even too early to say whether it indicates a decisive turn in the trade deficit itself.”

The dollar has been falling steadily against most other major currencies for almost three years, losing almost half of its value against the yen from its peak in February, 1985.

The long decline was supposed to help shrink the U.S. trade deficit by making American goods more affordable abroad and foreign products more expensive in the United States. But, although U.S. exporters have made spectacular gains over the last year, Americans have continued to buy foreign goods despite relatively higher prices, leaving the trade gap almost as wide as before.

Friday’s trade numbers suggested that the dollar could stabilize or even start rising again, inciting heavy demand for the currency and fueling a rally in stocks and bonds.

The monthly trade report’s impact on the financial markets has bedeviled many analysts because the figures are extremely volatile and are not adjusted to take account of seasonal variations and changes in prices. Investors have focused on them anyway.

When the trade figure has been higher than expected, it has generally driven markets down. That is because traders fear that the dollar will have to fall further before market forces finally will turn the U.S. trade deficit around. And that prospect triggers another: that the Fed might have to tighten the money supply to prevent the dollar from falling too far, a step that tends to increase interest rates.

When the August trade deficit, announced on Oct. 14, exceeded the markets’ expectations, the Dow Jones Industrial Average lost 95 points, a prelude to the 508-point plunge on Oct. 19.

Conversely, when the monthly trade deficit has fallen below expectations, as on Friday, the reverse has typically occurred.