7 Major Powers Support Stable Exchange Rates

The United States and six other leading industrial countries announced their opposition Tuesday to excessive instability in currency exchange rates, but they offered no new policies to hold the dollar at its current value.

There is “an explicit agreement among some of us” on measures aimed at preventing the dollar from either falling or rising substantially, a senior Reagan Administration official told reporters.

But he declined to detail what actions would be taken by economic policy-makers from the major industrial powers in the event of a substantial shift in the dollar’s value.

Follows Consultations

The statement of the seven nations, which came after several weeks of international telephone consultations among economic officials following the worldwide stock market crash in mid-October, was aimed at repairing the tattered “Louvre accord” reached by the same countries at a meeting last February in Paris.

“The process of policy coordination and cooperation is alive and well,” the senior Administration official insisted.

The sudden collapse in the stock market led Treasury Secretary James A. Baker III effectively to scuttle the Louvre accord by opposing higher interest rates in defense of the dollar out of fear that a further rate increase would tip the U.S. economy into recession.

Since the market crash, the dollar has fallen more than 10% against the Japanese yen and nearly 8% against the West German mark, the world’s two other major currencies. In New York Tuesday, the dollar was quoted at 126.4 yen and 1.6275 marks.

At the time of the accord, the major industrial powers pledged to intervene in currency markets and coordinate economic policies to stop the slide in the dollar. The United States agreed to cooperate with foreign officials even though bolstering the dollar could have undermined efforts to reduce the U.S. trade deficit.

Agreement on Dollar

By contrast, the latest statement suggests that foreign officials now agree that a rise in the dollar from its current levels could be just as damaging as a further drop in the U.S. currency.

At the same time, the new agreement is somewhat less specific than the Louvre accord in calling for support of the dollar at approximately its current levels.

“Either excessive fluctuation of exchange rates, a further decline of the dollar, or a rise in the dollar to an extent that becomes destabilizing to the (trade) adjustment process . . . could be counterproductive by damaging growth prospects in the world economy,” the statement said.

After the failure of the earlier accord to stabilize exchange rates, it was unclear how currency markets would react to the fresh vows from economic officials. The dollar opened marginally higher in Japan today but later declined as markets began to digest the announcement of the new accord.

Well-Timed Statement

The widely anticipated statement appeared well timed to take advantage of the normally lackluster exchange market trading at this time of the year. Currency traders are unlikely to push the dollar much in either direction at least for the next few weeks.

The decision to issue a statement without a formal meeting of finance ministers and central bankers from the seven leading industrial democracies--the United States, West Germany, Japan, Britain, France, Canada and Italy--appeared to be designed to prevent disappointment among currency traders over the lack of any new policy measures beyond those already announced in recent weeks.

“The markets didn’t expect much and they won’t be disappointed,” said Robert Hormats, a former State Department official specializing in international economics and now vice chairman of Goldman Sachs in New York. “I don’t think this will draw much attention from traders tomorrow.”

After the February agreement in Paris, the dollar had remained relatively stable until shortly before the stock market plunge. During that period, it was bolstered both by massive dollar purchases of central banks and by a more restrictive monetary policy in the United States, which pushed up interest rates here and made dollar-denominated securities more attractive.

Looking to Trade Deficit

Economic officials, while mostly papering over their policy differences, are now counting on an improvement in the U.S. trade deficit to provide further support for the dollar. The government reported earlier this month that the U.S. trade deficit hit a record $17.6 billion in October, but many economists are expecting a sharp decline in the November deficit.

The statement, released on the same day President Reagan signed this year’s budget into law, was timed to come out simultaneously Tuesday night in all seven nations.

While praising the U.S. deficit reduction agreement and West Germany’s recent fiscal and monetary stimulus measures, most officials acknowledge privately that neither the U.S. nor German actions go far enough to overcome the imbalances in world trade that have helped weaken the dollar.

Future Steps in Doubt

Any further steps among economic policy makers to help move the world economy toward a more stable path remain in doubt.

Although Treasury Secretary Baker is expected to refrain from encouraging the dollar to drop further, he is also wary of seeing the Federal Reserve boost interest rates to support the dollar. At the same time, German officials show no inclination to stimulate domestic spending, despite recent reports that the German economy is expected to eke out at most 1% to 1.5% real growth next year.

Officials of other countries have recently been pressing the United States to issue Treasury bonds denominated in marks or yen--a move that took place once before in 1978--as a means of protecting them against exchange market losses on their financing of U.S. budget deficits. But Treasury officials have resisted such pleas, and the senior Administration official said Tuesday that there were no plans to do so.