U.S. and Allies Meet on Halting Fall of Dollar
Seventeen months ago, at New York’s Plaza hotel, Treasury Secretary James A. Baker III masterminded one of the most successful economic policy moves of the Reagan years, forging an agreement among top officials from five leading industrial nations to help drive down the value of the dollar.
But this weekend, as those same economic officials gather again for a crucial meeting here, the steady slide in the U.S. currency that was designed ultimately to help shrink the nation’s overwhelming trade deficit is in danger of plunging out of control.
Mr. Baker, meet Dr. Frankenstein.
In Mary Shelley’s classic horror tale of the brilliant scientist, Dr. Frankenstein concocts a creature who, after an initial spell of friendship, eventually turns on his creator and destroys him.
Expectations Exceeded
For Baker, the dollar’s decline of more than 40% against the Japanese yen and major European currencies, which has helped the Reagan Administration forestall damaging protectionist trade legislation while waiting for the long-delayed turnaround in the trade deficit to begin, already has exceeded his fondest expectations.
But any further significant plunge in the dollar, officials of the United States and its major trading partners fear, threatens to bring on a recession in the export-dependent economies of Japan and Europe that could rapidly engulf the global economy in a self-destructive trade war.
The challenge facing Baker and Federal Reserve Chairman Paul A. Volcker from the United States and their counterparts from Britain, France, West Germany and Japan--the so-called Group of Five--is to forge an agreement that will convince participants in the uneasy currency markets that they have a credible plan for reducing trade imbalances and stabilizing the dollar.
Market Reaction Feared
“They need a statement from the meeting that shows what concrete steps each country will take to assure (currency) stability,” Jerry Jordan, chief economist at First Interstate Bank in Los Angeles and a former economic adviser to President Reagan, said late last week. “Without some real signs of international cooperation on economic fundamentals that every party feels they can benefit from, I’m afraid the markets could react very badly.”
After a series of informal closed-door sessions Saturday among senior monetary officials from the Group of Five, finance ministers from those nations plus those from Canada and Italy are expected to announce an accord today aimed at reducing the dollar’s wild swings in return for commitments from West Germany and Japan to stimulate their domestic economies.
A Treasury Department spokeswoman confirmed late Saturday night that the day’s only discussions were a “series of informal consultations and a private dinner” among officials of the five nations.
“The only formal meeting,” she said, “is a G-7 meeting tomorrow,” referring to the Group of Seven.
Adding to the tension surrounding the monetary talks was Brazil’s announcement of a moratorium on interest payments on its $70 billion in debts to foreign banks. And Argentina, another trouble-plagued Latin American debtor, also threatened to refuse payment on its foreign debt unless private bankers and key multilateral lending institutions arranged a package of loan concessions similar to that offered last year to Mexico. The combined actions raised the possibility of parallel joint action by other Latin American debtors.
The high-level sessions here this weekend, monetary sources said, represent the culmination of a long series of behind-the-scenes negotiations aimed at establishing the outlines of a credible pact. The reason for playing down the significance of Saturday’s meetings was to avoid ruffling the feathers of Italian officials, who threatened to bolt the talks unless the Group of Seven meeting was the principal forum for decisions.
Finishing Touches
Participants hope they can put the finishing touches on an accord that will convince the markets their halting efforts at international economic cooperation are finally about to pay off in smoothing out huge global trade imbalances without requiring any further significant depreciation of the dollar.
The Reagan Administration, under increasing pressure from Congress to narrow last year’s record $170-billion trade deficit or face harshly protectionist trade legislation, has been pushing West Germany and Japan for months to stimulate their economies so that they can absorb a much larger share of the world’s exports. Last year, Japan had an overall trade surplus of $89 billion, while West Germany’s also hit a record $63 billion.
The drop in the dollar over the last two years, which has helped make U.S. goods much less expensive in international markets while putting pressure on foreign producers to boost their prices, is finally expected to start producing a visible improvement in the U.S. trade picture this year.
More Action Urged
But most analysts are convinced that much more needs to be done--including measures to shrink the federal budget deficit and bolster U.S. investment in conjunction with greater economic growth abroad--to assure an end to the wild currency swings of the past several years.
While conceding that such high-level meetings as this one can foster greater currency stabilization, Volcker told Congress last week that simply intervening in foreign exchange markets “in no way substitutes for the more basic economic policy coordination or consistency.”
Since the Plaza hotel accord in September, 1985, at which Baker stunned most economic observers by reviving the nearly moribund G-5 monetary group to dramatize the Administration’s reversal of its strong dollar policy, the activist Treasury Secretary has been playing an international poker game with the highest stakes.
He dazzled currency markets with a round of international interest-rate cuts and a carefully orchestrated jawboning of the dollar’s fall to prod action from West Germany and Japan while also holding out the promise of greater economic-policy coordination among major industrial nations.
Last May, Baker skillfully extracted agreement at the Tokyo economic summit from leading U.S. trading partners to establish a new mechanism for economic cooperation, following it up in October with a loosely defined pact between the United States and Japan that helped stabilize the yen-dollar relationship until last month.
Tense War of Words
Meanwhile, the increasingly fractious dispute between the United States and West Germany over their often divergent ideas on how to sustain world economic growth seemed stalemated. With Bonn insisting that the Reagan Administration had to do more to cut the U.S. budget deficit, while American officials blamed West Germany’s excessive fear of inflation for its failure to stimulate, the war of words across the Atlantic grew increasingly tense.
But when a sudden plunge in the greenback on foreign exchange markets began during a wild-and-woolly week a month ago that followed a series of confusing statements by Reagan Administration officials, monetary officials were forced to consider much more serious actions in a bid to forestall a dangerous further decline in the dollar.
Not only are officials worried that the dollar’s drop from current levels could push the already-weakened West German and Japanese economies into a recession, there is also growing fear that a failure to brake the fall in the dollar would mean a revival of inflation in the United States and mounting pressure on the Federal Reserve to push up interest rates.
Traders Growing Cynical
Many currency traders, while craving exchange rate stability, are becoming increasingly cynical that monetary officials can overcome their differences enough to produce much more than a paper agreement.
“If you look at the exchange rates, you might say that the meeting is being treated with skepticism even before it’s begun,” one currency trader at a large Frankfurt bank told the European edition of the Wall Street Journal. He pointed out that the dollar has fallen slightly since reports of the meeting leaked out Wednesday night, rather than rising on expectations of a successful accord.
And Geoff Horton, chief economist in the London office of the DRI consulting firm, commented, “When you come to the question of what they actually can do, I’d say that apart from talking, there isn’t a great deal.”
But monetary officials here say they realize the intensity with which traders are focusing on their deliberations and hint that their earlier efforts to play down its importance may have been aimed at presenting currency markets with a more attractive package when investors return to their computer terminals on Monday morning.
“We would not have called a meeting,” a senior French official said Saturday, “if we did not have some hope of an agreement.”
