Central Banks Meet to Plan Dollar’s Rescue : Discussions Will Focus on Stabilizing Currency

Faced with a faltering dollar and a market poised to drive it even lower, central bank governors from major industrial countries are scheduled to meet in Switzerland today to plan how best to prevent a rout of the U.S. currency.

Financial markets have been bearish on the dollar in the run-up to Tuesday’s presidential election, which serves as a worrying reminder of America’s inability to reduce its doggedly high trade and budget deficits.

News on Friday that U.S. unemployment fell to 5.3% in October took some pressure off the currency by showing the economy was growing more strongly than expected, but analysts say the dollar will likely lose more ground.

The policy tools at central bankers’ disposal on the eve of the election may be no match for the simmering market bearishness that has been undermining the dollar.

Analysts also question whether central banks share the resolve needed to pin the currency around current levels, noting that only the U.S. Federal Reserve Board and the Bank of Japan intervened to support the dollar last week.

Bank of Japan sources said Wednesday that the central bank governors’ regular monthly meeting at the Bank for International Settlements in Basle will focus on stabilizing the dollar, perhaps by altering monetary policy.

Not Much Support

But one European monetary source said: “The Europeans are a little less ready to get involved in some kind of fine-tuning of exchange rates. They are quite conscious of the fact--maybe more than Japan and the U.S.--that certain fluctuations will always occur and there is little you can do about them.”

European central bankers tend to view the current dollar weakness as a natural correction to its rally this year from historic lows at the end of last year, the source said.

The Japanese yen ended last week below 125 to the dollar, compared to its highs of around 120 at the end of last year. The West German mark, trading at about 1.78 to the dollar, is much further from its year-end highs of around 1.58.

And because inflation prospects are greater in Europe than in Japan, European monetary authorities are loath to ease monetary policy to help prop the dollar.

Urgent Message on Deficit

Such differing perspectives and the absence of Fed Chairman Alan Greenspan from today’s meeting rule out adoption of any broad policy changes, although the governors still agree they must work together to prevent a dollar free-fall.

“If the (dollar) decline accelerates and becomes more steep, some intervention might be necessary,” the source said.

Even though the Fed stepped into the market repeatedly last week to buy dollars against yen, some U.S. economists speculate that the United States will tolerate a gradual, orderly decline. Fed intervention is regarded as an attempt to preserve stability ahead of Tuesday’s election, they add.

The bankers are sure to press home U.S. monetary officials the urgency with which the next President must address the U.S. budget deficit. Unless he can convince financial markets he has a credible plan to reduce the spending gap, a renewed assault on the dollar is assured. The U.S. trade deficit seems stuck at $10 billion to $11 billion a month, and signs are that the budget deficit is going to start rising again in 1989, said George Magnus of Warburg Securities in London.