U.S., Allies Agree on Plan to Depress Value of the Dollar : Will Intervene in Currency Markets if Necessary in Attacking Trade Deficit

The United States and four of its major trading partners announced Sunday that they would intervene in international currency markets, if necessary, to drive down the value of the dollar, whose strength is a key cause of the soaring U.S. trade deficit.

The action is designed to head off pressures in the U.S. Congress and in other nations to erect new barriers to imported goods. But it also eventually could force Americans to pay more for foreign cars, video recorders, shoes, toys and a host of other imported goods--as well as for the domestic products that compete with the imports.

In an unusual display of public unity, Treasury Secretary James A. Baker III and the finance ministers of Britain, France, West Germany and Japan vowed to resist protectionist pressures at home that could set off trade wars. In a joint statement, they insisted that the dollar has disrupted international trade because it is overpriced in relation to the other nations’ currencies.

Hurts Trade Posture

The strong dollar damages the U.S. trade posture in two ways: by making imports relatively cheap for American consumers and by making U.S. goods relatively expensive when sold overseas.

Foreign goods now are flooding into the United States, U.S. exports are stagnant and the merchandise trade deficit--the gap between what the nation imports and what it sells abroad--is expected to reach a record $150 billion this year. Although consumers may appreciate low-priced imports, American workers are losing their jobs to foreigners, and that has generated a protectionist outcry in Congress.

Although the world economy is basically healthy, Baker said at a press conference after the extraordinary Sunday meeting, the relation between the dollar and other currencies should “better reflect fundamental economic conditions.”

‘Intervention . . . Helpful’

Federal Reserve Board Chairman Paul A. Volcker, who also attended the meeting, said: “Foreign exchange rates are important . . . and intervention may be helpful at times.” These seemingly innocuous words, when delivered by so influential an official as Volcker, may have profound impact.

Robert Hormats, vice president of the New York investment firm of Goldman, Sachs, predicted that the “markets will react” by bringing down the price of the dollar, which is 38% stronger against a basket of trading partner currencies than it was five years ago. Since the dollar’s peak in March, a Shearson Lehman Bros. index shows that it has fallen 9%, although it has remained relatively stable since July.

If the dollar does not fall from its present level, the industrial nations--called the Group of Five--will sell their own dollars on world markets to depress the currency.

“They wouldn’t have a meeting of this sort with all the public relations without having made a firm decision to do something,” he said.

Reagan Administration officials are confident that Sunday’s statement of intent from America’s trading partners will bolster their efforts to head off the torrent of bills in Congress to restrict imports. Initial comments from key members of Congress indicated that Sunday’s action might slow the rush toward protectionism.

President Reagan will deliver a major address on trade today, denouncing legislative efforts to stifle the flow of foreign goods and insisting that unfettered trade is vital to world prosperity.

The trade ministers of the five nations, in their joint statement, said that if nations begin building new trade barriers, the result will be “mutually destructive retaliation, with serious damage to the world economy.”

Nigel Lawson, the British chancellor of the exchequer, said they have “absolute determination to resist” protectionist impulses.

As they came to the microphones individually at the press conference, the finance ministers repeatedly emphasized their willingness to move into the currency markets, if necessary, to push down the dollar.

‘As Close as Ever’

“We are about as close as our five countries have ever been,” Lawson said.

“We have never been so specific before,” added Pierre Beregovoy, France’s minister of economy and finance.

If the dollar falls, the prices of imports would rise, easing the competitive pressures on American manufacturers. U.S. consumers would be expected to buy fewer imported products and American goods would be cheaper in foreign markets. And more Americans would be employed making goods for consumption both at home and abroad.

But the United States would pay a price in inflation. Economists estimate that each 10% decline in the value of the dollar adds another percentage point to inflation.

Drop of 30% Seen

Many economists believe that the dollar should drop by 30% to help make U.S. goods competitive again, and that could turn the prevailing 4% annual inflation rate into a 7% rate for the year in which the dollar’s decline occurred. In fact, however, economists expect that the effect would be gradual, with the full impact on prices of a declining dollar not felt for a year or more.

Financial leaders of the Group of Five, meeting Sunday when the world’s currency markets are closed, reported that “significant progress” has been made on the road to “steady non-inflationary growth” in the world economy.

In individual statements, they promised specific policies designed to strengthen each nation’s economy and improve its markets for foreign goods:

--The United States will try to cut government spending, overhaul its tax code and allow its money supply to grow fast enough to fuel economic growth but not so fast as to risk inflation.

--Britain will endeavor to cut government spending and reduce taxes.

--France will try to cut public spending, modernize financial markets and control inflation.

--West Germany will try to promote economic growth and cut government spending and taxes.

--Japan will try to stimulate economic growth and liberalize financial markets to permit more foreign investment in the yen.

By agreeing to expand their economies, West Germany and Japan will be increasing their consumers’ demand for imports. This expansion should provide additional markets for American products, especially if the German mark and the Japanese yen grow stronger.

The series of policy steps by the five nations demonstrate a “positive means of addressing concerns about the large trade imbalances among our countries,” Baker said. “We agreed that turning toward protectionism would be very dangerous for the world economy and that it is essential to resist pressure for restrictive trade measures.”