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Dollar sinks on

french finance

minister's resignation

NEW YORK: The dollar sank in late afternoon when the resignation of France's Finance Minister Alain Madelin set off a flight into the German mark.

French Prime Minister Alain Juppe rocked the currency market out of its Friday afternoon doldrums by announcing that Madelin had stepped down, saying the reformist minister was too aggressive.

With the news, currency dealers scrambled to unload their French franc positions and the panic soon sparked intense selling of the dollars for marks.

"The sudden surge in demand for marks created a trap door environment under dollar/mark," said David DeRosa, director of foreign exchange at Swiss Bank Corp. "Since the mark was heavily in demand, people actually started selling dollars."

The dollar ended in the U.S. at 1.4705/10 marks, down from 1.4773/78. It was virtually unchanged at 96.60/70 yen.

The news fightened currency players, who worried that the French government would balk at imposing substantive fiscal reform in the pension and social benefits sectors. The shakeup was the first crisis faced by Conservative President Jacques Chirac, who came to power in May.

"It may be a signal that the social reforms in France will take precedence over fiscal responsibility," DeRosa said.

The French government immediately named a successor, Planning Minister Jean Arthuis, but players were divided on whether or not the move would assuage market anxieties over France's commitment to fiscal discipline in preparing its 1996 budget.

"I expect the mark to come off and the dollar to come back up on this," said one dealer at a major French bank. "This was pre-arranged. There was no surprise in this if they've already nominated a replacement.

For most of the day, the dollar was trapped within a narrow range, paralyzed by cautious sentiment.

"It was like a morgue here for about three hours," said Bruce English, manager of institutional foreign exchange sales at ABN Amro. "The news came out about French finance and people used that as an excuse to sell."

Dealers, worn out by wild gyrations in the market on Thursday, were in no mood to assumne risky positions.

Despite the dollar's slippage, most dealers said the U.S. currency firmly retained its upward direction that has carried it higher through much of the summer.

"I don't think it in any way negates the general uptrend of the dollar," said English. "It's just a consolidation phase."

The dollar stood at 1.2085/95 Swiss francs, down from 1.2172/82 at the open, and at Canadian $1.3451/56, from C$1.3535/40. Sterling closed at $1.5500/10, up from $1.5445/55 at the open, while the Australian dollar stood at $0.7436/41 versus $0.7430/35.

At midday, the Morgan Guaranty trade-weighted index stood at 94.0, from 94.2 on Thursday.-Reuter