Success is Rare as Central Banks Fight to Prop Up Dollar

One day late last week, as the dollar’s value took another pummeling on world markets, the Swiss National Bank bravely tried to stand in the way.

Officials of the Zurich-based bank got on the telephone and placed orders with Swiss traders for millions of dollars, in exchange for Japanese yen held in the Swiss treasury. But the dollar continued plunging.

So, in an unusual departure from the hush-hush behavior of national banks, the Swiss went public with their message. They announced that they were acting in concert with the Bundesbank--the central bank of West Germany--and the U.S. Federal Reserve. All had their own reasons for purchasing millions of dollars in an effort to prop up the currency’s value.

Unfazed, traders around the world kept bidding the greenback downward, leaving the banks with stacks of cash that lost value by the hour. “That’s a hell of an announcement for a central bank,” Robert A. White, a vice president at First Interstate Bank, said of the Swiss action. “And it didn’t do a thing.”

Central banks representing Europe, Japan and the United States have dipped into their national treasuries repeatedly in recent weeks to buy billions of dollars in an attempt to bolster the U.S. currency. Reports of their efforts have become common within the skittish, rumor-prone currency markets around the world.

Yet for all the wealth these national banks command, their effect on the computerized bazaars, where vast quantities of currency are traded daily like wheat or coal, has been little more than symbolic. In contrast, Thursday’s announcements that the United States was raising interest rates while Japan was lowering them were the sort of news that impressed the marketplace.

“The most effective action would be for the United States to raise interest rates at the same time that Japan lowers interest rates,” said A. C. Moore, director of research at the Argus Research Corp. in New York, shortly before the policy changes were made public.

Most observers agree that the buying and selling efforts of the banks slowed the dollar’s skid and averted panic selling. The interventions can cost individual speculators dearly if they are caught off guard. And such moves have extra punch if they occur during a period of light trading.

But ultimately, the banks’ efforts have had about as much effect on restraining the dollar market as a rickety roadblock would have on a roaring train.

The volume of dollar trading can exceed $100 billion worldwide some days, analysts point out, overwhelming the banks--despite extraordinary April purchases totaling $10 billion by the Bank of Japan alone. The Federal Reserve, the Bundesbank, the Swiss, British, Dutch and others have all sought to manipulate the market in recent days, although individual banks rarely purchase more than a few hundred million dollars on a given day.

“The activities of the central banks amount to no more than 5% to 10% of the total trading volume, even with a concerted effort,” said Moore. “The other 90% is governed by market forces.”

And the market--multinational corporations, institutional investors and other powerful financial interests worldwide--has sought a lower dollar than the banks and the governments they are acting for.

Since the dollar reached its peak in February, 1985, concern has grown about the U.S. trade deficit with Japan and other countries--a situation in which a flood of dollars has been flowing overseas, reducing the currency’s value. In addition, evidence of re-emerging inflation in the United States has made dollar investments less attractive to foreigners than they were even a few months ago, particularly at the recent level of interest rates.

The market is dubious about the wisdom of trade sanctions, as well. A House vote to impose trade sanctions against certain exporting nations halted the dollar’s recovery, until news spread of the interest rate changes.

In contrast with the markets, the major industrial democracies have wanted the dollar to stop falling for several reasons. Japan and others have endured painful increases in export costs as their own currencies have risen in value for more than two years. Within the United States, the softer dollar is being blamed for new inflation.

This attitude represents a major shift. Until recently, U.S. officials have encouraged the dollar’s nose dive.

The reason is that a cheaper dollar is not all bad for the United States: It makes U.S. goods more cost-competitive on world markets and thereby cuts into the trade deficit. The United States and key trading partners, including Japan, gave their blessing to the falling dollar at an unusual meeting in New York City in September, 1985, as part of a plan to head off protectionism in the United States and to stimulate the world economy.

By last winter, however, the cheaper dollar’s cost had become painfully clear to those same nations. This was especially true for the Japanese, whose yen had soared, forcing export costs up and profit margins down.

‘Leaning Against Wind’

As a result, the United States and its trading partners agreed in Paris in late February to try and stop the dollar’s plunge.

But, contrary to the New York City accord, in which the countries supported what was actually happening among the traders, they took on a bigger task in Paris--to resist powerful market forces that were pressing the dollar through the floor.

“Once you begin to lean against the wind, then you’re in an entirely different ball game,” said Jacob Dreyer, deputy assistant director of the Congressional Budget Office and a specialist in currency movements.

A close look at different currencies shows that the dollar and yen are in a special situation. Since the dollar’s peak in February, 1985, it has lost roughly half its value both to the yen and the West German mark. But since the Paris meeting, it has lost only a little to the mark and other European currencies. By contrast, it has lost an additional 9% of its value to the yen--amid growing concerns about a U.S.-Japan trade war and heightened awareness of the U.S. trade deficit with Japan.

The governments’ most tempting tools with which to manipulate currency rates are their central banks, since big changes in national policy that would have more long-lasting effect are far more difficult politically. Higher U.S. interest rates, for example, could damage economic growth and thus have been resisted by the Administration until recently.

Higher Rates Suggested

One close observer of the Federal Reserve chided the bankers for having an exaggerated sense of their ability to influence the market:

“Authorities--erroneously in my judgment--think they know what is the ultimate path and speed of the decline,” he said.

Analysts point to certain things that they say would strengthen the dollar far more than the interventions of national banks.

The most frequent suggestion is for higher interest rates in the United States. Fears that inflation will intensify in the United States have made the dollar less attractive to foreigners, and higher interest rates are seen as a way to combat this.

Following news of the rate changes Thursday, the dollar closed in New York at 140.95 Japanese yen, up from 139.00 yen Wednesday. It also rose to 1.7935 West German marks, up from 1.7885 marks.

American business hopes that lower rates abroad will stimulate foreign economies, enhancing export opportunities for U.S. exporters. On Thursday, for example, Federal Reserve Chairman Paul A. Volcker told House members that lower interest rates in Japan are the “appropriate kind of approach at the present time.”

Also awaited by those who buy and sell dollars would be convincing evidence of a turnaround in the U.S. trade and budget deficits. Some economists say the U.S. trade situation is improving and that this will become more apparent in the coming months.

In any case, the specter of a free-falling dollar is unlikely. A natural plateau for the greenback exists somewhere in the marketplace, even if it is at a lower level than that sought by various national governments.

“This isn’t a bottomless pit,” said White of First Interstate. “There comes a point at which the dollar is cheap enough that it becomes a good investment.”