The dollar edged up further against other currencies Wednesday, boosted by a Japanese news report that the United States, Japan and West Germany have agreed secretly to fix its value, within a range, although the three-day rally showed signs of petering out late in the day.
The unconfirmed television report by the Japanese Broadcasting Corp., NHK, which said the three countries are seeking to maintain a range for the dollar at somewhere between 120 and 140 yen, gave the market a sharp jolt upward. It was the latest in a series of indications that the world's major industrial powers have mounted an extraordinary united effort to keep the U.S. currency from returning to the unnerving record lows it hit just a few days ago.
Cites Change in Psychology
"What the central banks have done is broken the perverse, negative psychology that was affecting the dollar in recent weeks," said Michael J. Moran, chief economist with Daiwa Securities America in New York.
The dollar closed at 129.35 yen in New York trading, up from Tuesday's close of 127.80 yen. It finished at 1.6470 West German marks, up from 1.6310. And, despite some sliding late in the day, the rally survived after the U.S. markets closed, with the dollar opening at 130 yen in Tokyo this morning.
Later, the dollar retreated marginally and ended the morning session at 129.35 yen. It lost ground as Japanese exporters actively sold the currency to cash in on profits, dealers said.
On the Tokyo Stock Exchange, the 225-stock Nikkei index, which jumped 1,215.22 points Wednesday, lost 113.87 points to close the morning session at 22,676.63.
The dollar's continued vitality spread at least some enthusiasm to the stock market, where the Dow Jones industrial average closed up 6.30 points, following gains that totaled 92.67 points earlier in the week. A rising dollar encourages investors because it reduces the likelihood of inflation and higher interest rates.
Since Monday, the dollar has mounted dramatic gains against the yen and mark, recovering the ground it lost in the last days of December, when pessimism over its prospects pervaded the world's currency markets. New York's closing dollar quote of 129.35 yen, for example, contrasts with a level just above 120 yen reached in Tokyo at the beginning of this week.
In addition to the Japanese news story, the dollar was aided Wednesday by further official declarations of support. West German Finance Minister Gerhard Stoltenberg told a newspaper that the "full impact" of the industrial nations' commitment to stabilizing the dollar is only now becoming clear. And Satoshi Sumita, governor of the Bank of Japan, spoke enthusiastically of the dollar's prospects at a Tokyo press conference.
But signs that lingering worries over the U.S. trade and budget deficits were undermining the dollar re-emerged in Tokyo, as the currency started to give way to the yen in erratic trading, reportedly prompting the Bank of Japan to enter the market with small, symbolic dollar purchases.
According to the Japanese news story, the major industrial powers have also agreed to set aside individual funds of $5 billion to be used for buying dollars when the currency slips below their agreed-on floor.
Although the Japanese news report could not be confirmed, it seemed to reinforce a similar statement made Tuesday by French Finance Minister Edouard Balladur and made currency traders reluctant to gamble that the dollar will plunge again soon. In recent days, many speculators have taken a beating in the dollar market as the central banks' aggressive interventions caught them off guard.
"It may or may not be true, but it does keep speculators off balance and keep them from selling the dollar," said Allen Sinai, chief economist for the Boston Co. and Economic Advisers Inc., subsidiaries of Shearson Lehman Bros. in New York.
In late December, when the dollar was hurtling downward, the Group of Seven, comprising the leading industrial nations, announced that it would support the currency. But many currency speculators believed that the diverse group of nations could not back up the pledge, provoking an ever faster fall of the dollar.
The first days of 1988 have provided a vivid contrast. The economic powers have surprised the financial community with their coordinated efforts to buy dollars--purchases totaling more than $1 billion on Monday and Tuesday--and by a steady stream of pronouncements designed to underline that support.
"The (Group of Seven) now, and particularly the United States, Germany and Japan, seem to be willing to put their money where their mouth is," observed David L. Horner, a senior financial strategist with the investment firm of Merrill Lynch, Pierce, Fenner & Smith. "They're saying: 'The buck stops here.' "
The world's central banks, led by the Bank of Japan, made dollar purchases of about $100 billion in 1987, an immense investment that failed to stop the currency from plunging early and late in the year. As a result, currency traders have been taken aback by the banks' vehement--and successful--defense of the dollar this week.
Although the weaker dollar has helped U.S. industry become more competitive, it has disadvantages. A plunging dollar is financially disruptive, triggering fears of inflation and cutting into the profits of foreign countries that depend on exports to the United States.
"The central banks have been very clever," said Brian Cronin, vice president and general manager in the global trading department of Security Pacific National Bank in Los Angeles. "They wrong-footed the market, and there's some blood on the street."
He added: "The (dollar's) movements have been very violent and vicious. They're the worst I've seen in quite some time."
Analysts agreed, however, that the actions in defense of the dollar have succeeded largely because traders are uncertain as to whether the currency is about to plunge much further. A key to the dollar's long-term prospects will be provided on Jan. 15, when the Commerce Department releases the U.S. trade deficit figure for November. Progress in cutting the stubborn trade imbalance is needed for a more permanent improvement in the dollar's value, experts say.
Moreover, some analysts expect the dollar to lose more ground to other currencies, such as those of South Korea, Taiwan and Hong Kong--nations with which the United States has large trade deficits but whose currencies have not strengthened nearly as much as the yen.
Economist Sinai said: "What we are witnessing now is a trading rally--and not to be confused with a change in the fundamental trend. Somewhere the dollar will stabilize and bottom out, but so far this upward burst is not that event."