Dollar Firms Up in Wake of Big Plunge : Europe Applauds Reagan Plan but Is Still Concerned

Government and private-sector economic experts in Western Europe applauded Tuesday the initiatives proposed by President Reagan to reduce the value of the dollar and dampen growing American protectionist sentiment.

But these experts also expressed concern that his program fails to address the key problem of the U.S. budget deficit.

Initially at least, West Germany, Britain and France appeared reluctant to do more to stimulate their own economies as a way of maintaining strong world trade.

Above all, though, Europeans expressed relief that, after years of tension and disagreement about the effects of an overvalued dollar, the United States and Western Europe had pledged joint action to reduce the relative value of the dollar.

“It’s a sign that something very important has changed,” said William Robinson, editor of Economic Outlook, a publication of the London Business School. “What we have to remember is that it’s a beginning, and only that.”

Gerhard Fels, deputy director of the German Economic Institute in Cologne, said, “For the first time, there’s a global effort to bring down the dollar’s value, but the core of the present crisis remains the (U.S.) budget deficit, and that must still be tackled.”

Core of Crisis Remains

The measures that Reagan announced Monday--among them a $300-million fund to help protect American companies against subsidized foreign competitors and an easier system for filing unfair trade complaints against foreign countries--are viewed by Europeans as necessary to head off a possible trade war in which they would be victims.

Reagan’s proposals followed Sunday’s agreement by the United States and its four largest Western trading partners to take joint action to lower the value of the dollar against major world currencies, a move that would make American products more competitive on world markets.

“It’s of vital importance to us to prevent a wave of protectionism in the United States that could spread worldwide,” British Treasury Secretary Nigel Lawson said Monday. “As a major trading nation, we have more to lose from a protectionist world than most countries.”

France’s Finance Minister Pierre Beregovoy said, “The great industrialized nations, including the United States, have finally agreed that floating exchange rates . . . don’t reflect the strengths of national economies.”

Still, the proposals announced by Reagan on Monday were dismissed in many quarters here as “window dressing” that avoids the central issue of the budget deficit. The negative impact of this affected the foreign exchange markets.

Following Monday’s wholesale retreat from the dollar, European exchange markets were more apprehensive Tuesday as uncertainty began to creep in about the depth of commitment of the five-nation accord to hold the dollar down.

The dollar rose slightly Tuesday against a trade-weighted basket of currencies, despite reported intervention by the German, Belgian and Japanese central banks.

However, while recent history has shown that coordinated central bank action aimed at manipulating the market value of a currency has usually failed, there was confidence among Europeans that this time it might work.

Swimming With the Tide

Although British efforts to defend the pound against a devaluation in the late 1960s, and U.S. efforts to prevent the dollar from dropping against European currencies a few years later, were both steamrolled by market forces convinced that the pound and the dollar were overvalued, this time the central banks are swimming with the tide--trying to force down a dollar that most economists agree should go down.

“They are pushing on an open door now,” Robinson said. “The risk could end up being that the dollar crash lands.”

To achieve what Robinson and others call a “soft landing” for the dollar at a level where American goods can be competitive, Europeans believe that Reagan must take new steps to tackle the budget deficit, which will total an estimated $175 billion this year.

Overseas money from Japan and Europe required by the United States to finance the deficit has been a key factor in keeping demand for the dollar artificially high, so only additional measures to reduce this gap can make a stable, lower-value dollar possible over the long term, they argue.

“Sunday’s agreement treats the symptom, not the cause of the crisis,” said Daniel Jeffreys, an economist at the Confederation of British Industry. “Only tighter U.S. fiscal policies will do this.”

Although Europeans and Japanese officials agree that tough fiscal discipline by the Reagan Administration could slow U.S. economic growth and world trade along with it, they appear to be reluctant to implement new policies that would support world trade and provide expanding markets for U.S. exports.

Couldn’t Lower Rates

In interviews Tuesday, respected private-sector economists in Britain and West Germany called for lower interest rates to stimulate domestic growth in the wake of coordinated pressure on the dollar.

“Previously, we couldn’t lower interest rates because we’d lose capital to the United States,” said Fels of the German Economic Institute. “Our upswing is stable and accelerating. This is the next most important step.”

However, Finance Ministry officials in Bonn said that interest rates are already the lowest in years and that there is no immediate consideration to drop them further.

At the weekend meeting in New York, West German Finance Minister Gerhard Stoltenberg reportedly resisted U.S. pressure for West German pump-priming measures beyond a planned $7.5-billion tax cut phased over the two-year period starting in January.

British economist Jeffreys argued that Sunday’s agreement gave Prime Minister Margaret Thatcher’s government a “unique window of opportunity” to cut interest rates without upsetting the crucial dollar-sterling exchange rate, but Treasury officials argued that domestic considerations are not right for such a move.

“It’s a period of tremendous uncertainty,” one Treasury official said. “Conditions are too volatile.”

The Japanese government reaffirmed its pledge to open domestic markets to more foreign goods, but no additional specific steps were announced.