The dollar advanced against most major currencies on Friday as questions persisted about the strength of the French franc despite an increase in interest on overnight loans by the French central bank.
Gold prices fell. At the Commodity Exchange in New York, gold for current delivery closed at $389.80 a troy ounce, off $1.30. As of 4 p.m. EDT, Republic National Bank quoted gold at $390.10 a troy ounce, down $1.65 from Thursday.For a second day, investors turned to the dollar as a safe haven from the pressures in the European Exchange Rate Mechanism, which sets major European currencies in a fixed trading range against each other.
"People want to get out of Europe for a little while," said Christopher Bourdain, a currency analyst at Credit Suisse.
France's central bank on Friday jacked up its rate for overnight loans from 7.75 percent to 10 percent in order to discourage speculators who have been borrowing money to bet on a devaluation of the franc.
The French and German central banks also sold German marks and bought francs again Friday to keep the French currency from dropping through the floor of its trading range against the German mark, currency traders said.
The two actions slowed the attack on the franc.
"Less sophisticated speculators ran for the exits in a hurry," said David Durst, an assistant vice president at Credit Lyonnais.
The franc has come under pressure because of Germany's policy of maintaining relatively high interest rates to thwart inflation. Speculators suspect that recession-plagued France will not be willing to maintain similar rates.
High interest rates in a given country usually lead to a stronger currency since investors can earn more on deposits in that currency. They therefore buy it aggressively, bidding up its price.
In other trading, the dollar edged up to 106.85 yen in New York on Friday afternoon. It had fallen nearly 3 yen to 105.25 yen the previous day on statements from a U.S. Treasury official supporting a strong Japanese currency. Traders said the Bank of Japan bought dollars early Friday to strengthen the greenback against the yen.
In Tokyo, the dollar traded at 106.55 yen late Friday, down 1.73 from a day earlier.