Baker, Yeutter Say Dollar Is Still Too High

Federal Reserve Board Chairman Paul A. Volcker cautioned Thursday that “we are approaching the danger zone” in the fall of the U.S. dollar, but top Reagan Administration officials endorsed a further decline.

Treasury Secretary James A. Baker III and U.S. Trade Representative Clayton Yeutter told separate congressional panels on Thursday that an additional fall in the dollar, which has dropped 30% against foreign currencies over the past year, would be helpful to the U.S. trade balance.

Although both denied any fundamental disagreement with the Fed chairman, their testimony, coming a day after Volcker testified that the dollar has “fallen enough,” clearly signaled the Administration’s position on the issue.

Concern Over Inflation

Asked about the Administration stance Thursday by members of the Senate Banking Committee, Volcker responded: “I’m not smart enough to know what the level of the dollar should be.”

But he reiterated that a continued fall could rekindle inflation and drive foreign investments out of the country. Such a “cumulative decline” in the dollar could “pass the point of being constructive and start being destructive,” he said.

And, in a direct reference to a claim by Yeutter that the dollar should drop at least another 10% to 15%, Volcker said: “Then I guess I’m not in agreement with Mr. Yeutter.”

Baker, testifying before the congressional Joint Economic Committee earlier in the day, denied that he had any “fundamental difference” on the issue with Volcker. Baker said he was talking only of an orderly continued descent of the dollar, not a “free-fall.”

“Clearly, no one wants to see a dramatic or precipitous drop in the currency,” Baker said. “Clearly, nobody wants to see a free-fall. Clearly, no one wants to see a loss of confidence.” And Yeutter, while claiming that he, Baker and Volcker were all “on the same wavelength,” told a House trade subcommittee: “In my opinion, we have not reached an equilibrium point.”

But Volcker did not distinguish between a gradual further decline or a quick one, and he said repeatedly that he did not know where such an equilibrium point might be.

He suggested that any further drop in the dollar might be hazardous, saying that “we are approaching the danger zone.”

Sen. William Proxmire (D-Wis.) commented: “It’s a novel theory that the decline of the dollar will not be of some help somewhere, all other things being equal.”

“All other things being equal is not a world in which I live,” Volcker responded.

In other testimony, Volcker:

- Said commercial banks and international financial institutions, particularly the World Bank, should be ready to mount a financial rescue effort for Mexico, still recovering from last fall’s earthquake and reeling from the impact of collapsing world oil prices.

- Suggested that the Fed might relax for heavily burdened rural banks its requirements on reserves that banks are now required to carry. “Temporarily, capital ratios might fall below standards we otherwise feel appropriate.”