U.S., 6 Countries Step In to Stem Dollar’s Plunge; Further Losses Predicted
Governments of the United States and its major economic allies temporarily blunted a new slide in the value of the dollar Thursday by intervening heavily in international currency markets, but traders predicted flatly that the U.S. currency would fall further.
The dollar went into a tailspin after an announcement that the U.S. trade deficit in February was unexpectedly high. The same report sent stock prices plummeting--the Dow Jones industrial index lost 101 points--and interest rates soaring.
A continuing fall in the dollar could prove costly worldwide. The Federal Reserve Board could try to prop up the dollar by raising interest rates in the United States and making investments in this country more attractive.
But that could also spawn a second stock market crash and threaten a global recession.
Thursday’s unexpected slide in the dollar came as an embarrassment to central bankers and finance ministers of the seven largest industrial nations, who have been meeting here this week as part of the spring session of the International Monetary Fund.
Just one day earlier the Group of Seven, as the policy makers are known, reaffirmed a Dec. 22 commitment to maintain a stable dollar. The ministers responded decisively to the initial test of that policy.
At the request of Treasury Secretary James A. Baker III, the group met secretly Thursday morning. Minutes after the dollar began to slide, central banks of all seven countries were buying dollars heavily in the currency markets.
That stemmed the dollar’s plunge, but not before it had fallen to 123.6 Japanese yen, down from 126.48 late Wednesday. The dollar was worth 1.663 West German marks late Thursday, against 1.695 the previous day.
Finance ministers and central bankers meeting in Washington sought to play down the significance of Thursday’s dollar slide.
Karl Otto Poehl, president of the Bundesbank, West Germany’s central bank, insisted that the dollar’s drop against the mark represented “a normal movement” between the two currencies. He suggested that Thursday’s rise in long-term U.S. interest rates “will probably help stabilize” the dollar more.
Japanese Finance Minister Kiichi Miyazawa served notice that the Bank of Japan would be poised to intervene heavily in the Tokyo currency markets this morning.
However, Wall Street analysts warned that the uncertainty in the markets might continue today and into next week, pushing the U.S. currency to new lows and forcing the Federal Reserve Board to force interest rates higher to keep the dollar from falling further.
Richard E. Witten, vice president in charge of currency trading at Goldman, Sachs & Co. in New York, predicted flatly that the dollar would fall substantially further in coming days, eventually settling to a new, much lower level.
More Intervention Seen
“The fact is that dollar sentiment is fairly bearish, and there are no quick fixes,” Witten said. “The dollar would have gone a lot lower yesterday if it hadn’t been for the central bank intervention, and it’ll go lower still tomorrow and next week. The central banks may prop it up for a few days, but that’s only a stopgap measure.”
David Hale, chief economist at Kemper Financial Services in Chicago, said the coming week “should see a major battle between the central banks and private investors over the dollar. In the end, private investors should win, driving the dollar down to 120 yen.”
Hale predicted that central banks would continue to intervene to make sure that the dollar reaches its new level smoothly.
Unanswered Question
“They don’t want to see a financial crisis,” he asserted. “The foreign central banks are behaving like Republican political action committees--and the cost may go up even more from here.”
If the dollar continues to slide indefinitely, it is not immediately clear how the finance ministers and central bankers--who said they believed that the dollar was at about the proper level Wednesday--will react.
The finance ministers seemed as much in the dark Thursday as everyone else. Asked whether the Group of Seven industrial nations would have to readjust its new base-level for the dollar, West German Finance Minister Gerhard Stoltenberg mused: “That is a very good question--a thousand-dollar question.”
Traders estimated that the United States, West Germany and Japan each bought between $250 million and $300 million in dollars Thursday--enough to provide a signal to the currency markets but not as massive as on some previous occasions. Some analysts estimated that total intervention by the seven nations amounted to less than $1 billion.
IMF Sees Faster Growth
The action in the markets came as, separately, the International Monetary Fund published an updated forecast predicting that the world economy would grow somewhat faster this year than the IMF staff had expected previously, with expansion in industrial countries averaging 3% instead of 2.5%.
However, the document warned that financial markets are still vulnerable and that another market crash such as the one that occurred last October could easily plunge the world into a slump or even a recession. It said that the industrial countries could take further action to reduce their trade imbalances--such as reducing the U.S. budget deficit and stimulating demand in Japan and West Germany.
Trade report causes stock prices to plummet. Part I, Page 1.
