Foreign Banks and Fed Said to Sell Off Dollars : Move Follows Through on Agreement at Toronto to Maintain Market Stability
The United States and other major industrial nations apparently signaled Monday that markets have pushed up the value of the U.S. dollar far enough. But it was too early to tell whether traders would take the hint.
Although U.S. officials would not confirm it, traders reported signs Monday that the Federal Reserve had intervened in the markets by selling dollars to help blunt the 2-week-old dollar rally. When the Fed floods the market with dollars, it helps to cheapen the greenback’s price.
By the time U.S. markets closed late Monday, the dollar was at 131 Japanese yen and 1.82 West German marks, slightly below the level at which it had closed in Europe earlier in the day. There were reports that central banks from other major industrial nations also had intervened.
Just after the first of the year, by contrast, the dollar fell as low as 121 yen and 1.57 marks.
Starting to See ‘Shadows’
Monday’s intervention, which was modest, apparently was intended to signal currency markets that the industrial countries were serious when they indicated at last week’s seven-nation economic summit in Toronto that they wanted to see continued stability in the exchange markets.
Some reports had erroneously suggested that the industrial governments would accept a “slight rise” in the dollar’s value. Actually, however, the summit participants merely reaffirmed informal currency targets that their finance ministers had set last December.
Not since last August had the United States sold dollars rather than buying them, as it does when it wants to help counter a dollar decline. The Fed, which operates independently of the Administration on almost all other policy matters, usually conducts its intervention operations on orders from the Treasury.
The dollar began rising about two weeks ago--after a report showing that the U.S. trade deficit had fallen sharply--and it has been climbing steadily since. Some analysts fear that if the dollar rises too much it could reverse some of America’s recent trade gains.
It was too early to tell whether the Fed’s action would be sufficient to blunt the dollar’s recent surge, although government authorities apparently got their point across.
“People (in the markets) are starting to see shadows,” said Richard Witten, vice president for currency trading at Goldman, Sachs & Co., the New York investment banking firm. “There’s no one right now who thinks the dollar is grossly undervalued” anymore.
The dollar’s recent rise had helped cool earlier inflation fears. When the U.S. currency’s value goes up, it eases inflationary pressures in the United States because Americans do not have to pay as much for imported goods. At the same time, however, they are likely to buy more from abroad.
Continuation of the dollar’s rally could pose a dilemma for the Fed, which is debating whether to raise U.S. interest rates to help dampen inflationary pressures that have been building in the economy. Higher rates in the United States would only push the dollar higher.
The Fed’s policy making Federal Open Market Committee is scheduled to meet here Wednesday and Thursday to consider whether to change money and credit policies.
Although the results of that meeting are kept secret until weeks after the vote, the panel is expected to decide to leave current policy as is--partly as a result of the dollar’s rise. The informal target ranges that the industrial nations reaffirmed last week for the value of the dollar and other currencies are the same that have been in force during the period of relative stability that has prevailed since last December.
Although finance ministers of the United States and its major economic allies never have made those ranges public, it is believed that the dollar did not pierce the ceilings even at its highest levels early Monday. Thus Monday’s intervention was intended only as a warning shot to traders.
