Dollar Plummets Despite Action by European Banks
The U.S. dollar, continuing an uninterrupted decline that began shortly before Christmas, plunged Wednesday against major currencies despite intervention by European central banks seeking to slow its fall.
The dollar’s retreat, according to analysts, generally reflects expectations of lower interest rates and a mounting trade deficit in the United States. Weak economic growth is contributing to prospects for lower interest rates, and November’s record $19-billion trade deficit dashed hopes that the worst of the trade imbalance is over, they said.
Adding to the worldwide market pressure on the dollar was a carefully hedged response by the White House to a story in the New York Times suggesting that the Reagan Administration wants the dollar to fall further.
“We have no level in mind, no goal and we are not trying to talk down the dollar or in any way influence the markets,” said a senior Treasury Department official who briefed White House reporters on the condition he not be identified.
But while denying that the Administration is encouraging the dollar to fall, White House statements apparently convinced currency traders that the Reagan Administration is not interested in supporting any foreign efforts to prop up the U.S. currency.
“The bottom line is the U.S. Administration has given the foreign exchange markets the green light to go after the dollar,” said Larry Kreicher, an economist at Irving Trust Co. in New York.
From the Administration’s viewpoint, a declining dollar could improve the U.S. trade picture by reducing the cost of U.S. goods overseas and boosting import prices in the United States. That, in turn, could erode sentiment for protectionist legislation opposed by the Administration that is designed to narrow the U.S. trade deficit by curbing imports.
At the same time, however, higher-priced imports raise the specter of higher inflation at home.
The relentless decline of the dollar showed no signs of abating Wednesday. The U.S. currency fell to 1.8325 German marks in New York, its lowest close since October, and neared its all-time low against the Japanese yen, dropping to 152.60 yen from 155.65.
Causing Little Worry in U.S.
So far, there is little indication that the dollar’s plunge is causing much worry among U.S. monetary officials. But the recent decline is putting particular pressure on European and Japanese central banks, which have bought as much as $9 billion in U.S. dollars since the beginning of last week in an effort to stem the tide.
“This situation is quite unlike 1979, the last time there was a free fall in the dollar,” said Geoffrey Bell, a leading international currency specialist in New York. “Now, all the problems are in the lap of the Europeans, while the Administration can afford to sit back because there is no urgency to act.”
As long as U.S. credit markets show no fears of renewed inflation, Bell said, there is little reason for the Federal Reserve to join foreign central bankers in halting the decline of the dollar.
“I don’t believe there is any new policy toward the dollar,” Bell added. “As long as things don’t get out of hand, the Administration benefits simply by doing nothing. The only thing that would stop this is heavy coordinated intervention by both Europeans and the Federal Reserve, but it simply makes no sense to unleash the Fed.”
Disagreement Over Policy
Today’s currency situation also reflects a fundamental disagreement over economic policies between the United States and its key trading partners.
Reagan Administration officials want West Germany to ease its restrictive economic policies, thus allowing interest rates to fall and speeding up a planned 1988 tax cut. But the West German government, which is less than two weeks away from parliamentary elections, has dug in its heels against U.S. pressure that might play into the hands of its political opposition.
Meanwhile, U.S. officials also have expressed recent disappointment with Japan’s failure to follow through on an October agreement by boosting government spending in its recent budget.
“This is a high-risk strategy,” said Robert Brusca, chief economist at Nikko Securities International in New York. “I call it an international game of chicken to see who blinks first.”
In Paris, French Finance Minister Edouard Balladur said that European nations and Japan “consider that the current drop of the dollar is excessive, unjustified and damaging for the world economy.”
Japanese Official’s Meeting
Toyoo Gyohten, the Japanese vice minister of international finance who is scheduled to make a speech in Washington next week, is expected to meet with Treasury officials to discuss the currency situation, according to reports in Tokyo.
Dealers said that the Bank of Japan had stopped intervening after several days of large dollar purchases aimed at slowing the yen’s rise.
Meanwhile, Reagan Administration officials were evasive. “You are asking me if the dollar is at an appropriate level,” the senior Treasury official said in response to repeated requests for clarification of U.S. policy. “I will not answer that question.”
And White House spokesman Larry Speakes, while refusing to explicitly deny the leak to the New York Times, complained that it did not reflect official policy. “Until you hear it from the secretary of the Treasury or the President,” he said, “it just ain’t so.”
