Analysts Uncertain Whether 5-Year Rally Over or Just Stalled : Intervention Has Curbed Dollar
What a difference two weeks can make.
On Feb. 26, the dollar was the undisputed king of the world’s currencies.
After rising for 16 out of 18 trading sessions, the dollar appeared unbeatable, setting records against the currencies of Britain, Canada, France and Italy, reaching 13-year highs against the West German mark and Dutch guilder and climbing to a 10-year peak against the Swiss franc.
Then the bubble burst, and the dollar has since retreated in nervous trading.
But even after its tumble, the dollar still is almost 6% higher than when the year began and more than 85% above its levels at the start of the 1980s. It remains strong enough to be considered a major threat to the survival of U.S. farms and businesses that compete for sales in international markets.
Analysts said Tuesday that the dollar’s record-shattering advance was halted by the concerted sell-off of dollars by Western central banks between Feb. 27 and March 1. And the currency has been undermined since by a drop in American interest rates and new doubts about the strength of the U.S. economy, they said.
No one is certain whether the dollar’s drop is just a pause in a rally or if the currency finally has peaked after its powerful five-year ascent. But foreign exchange dealers said traders no longer view the dollar’s rise as a sure thing.
“Before intervention, we were in a one-way market, with the dollar rising every day,” said Scott Pardee, an executive vice president at the investment firm Discount Corp. of New York who once headed the currency trading operations of the Federal Reserve Bank of New York. “The intervention worked because it created a two-way risk...You don’t know which way to go.”
That uncertainity was evident Tuesday, with the dollar plunging in early trading and then rebounding later in the day.
“It’s hard to know whether the dollar is going down or up; it depends upon when you ask,” Pardee quipped.
The tide began turning on Feb. 26 when Paul A. Volcker, chairman of the Federal Reserve Board, told a House banking subcommittee that central bank intervention is a useful tool and questioned if it had been practiced “forcefully enough” to have an impact on currency markets.
Intervention against the dollar involves government sales of dollars on the open market, adding to supplies of dollars and spurring demand for the foreign currency being purchased with dollars.
Volcker’s comments alone were enough to jolt foreign exchange markets. Within a matter of minutes, the value of a West German mark rebounded to 29.3 cents from 28.7 cents, which had been its lowest level since 1971.
That may not seem like a big shift but, to a trader who had completed a fairly routine $5-million purchase of marks as Volcker began testifying, that move had reduced the value of the investment by more than $100,000 by the time the Fed chairman had left the hearing room.
In the next three days, intervention by European central banks and the Fed dumped an estimated $4 billion on world foreign exchanges.
“It stopped the rise of the dollar,” Pardee said.
In one striking change of course in the past two weeks, the British pound recovered from an all-time low of just under $1.04 to close Tuesday in London at $1.085.
In the meantime, the United States is walking a very narrow line, said Mory Ogata, senior vice president and treasurer of Union Bank of Los Angeles.
“The government does not want an out-and-out running away of the dollar because of the plight of exporters,” he said. “But, at the same time, the government needs a continued inflow of capital” to meet American demand for redit and does not want the dollar to collapse.
The dollar’s explosive gains have hit farmers and manufacturers hard, leading to a record $123-billion trade deficit last year. When the dollar rises, the export price climbs for U.S. farm products and manufactured goods ranging from baseball bats to computers.
“The sharp appreciation of the dollar since 1980 has cost 2 million jobs,” said a study released Tuesday by Data Resources Inc., a private consulting firm in Lexington, Mass.
But the rising dollar has not been all bad.
With prices of imports falling, U.S. manufacturers also have had to hold down costs and improve productivity , helping tame inflation from the double-digit pace of 1979-80.
And the surge in shipments of goods to the United States had helped lift foreign economies out of a slump.
At the same time, the flow of foreign funds into dollar-denominated investments has helped the government finance record deficits and still allow interest rates to fall.
Pardee said foreign investors are still holding on to their large U.S. investment portfolios but have started taking some defensive actions to reduce the risk, such as buying options that would enable them to sell dollars at a guaranteed exchange rate at a specific date in the future.
And where is the dollar headed?
“The speculative tide has started to turn against the dollar,” said Lawrence Kreicher, an international economist at Irving Trust Co. in New York. “There really seems to be a fundamental reappraisal of the dollar over the last few days.”
A combination of low inflation and relatively high interest rates, coupled with the political stability of the United States, has been a major attraction for foreign investors.
