Dollar Continues to Climb Despite Major Intervention

Central banks of the world’s major industrial countries intervened massively in foreign exchange markets Friday in an effort to blunt a rise in the dollar, but the U.S. currency ended the day higher anyway, defying explanation by traders and officials alike.

The coordinated intervention--the largest since last fall, when officials were trying to prop the dollar up--was designed to show the markets that the governments intend to honor previous agreements to keep the dollar’s value stable.

The central banks had stayed out of the market during most of the dollar’s recent rise, prompting some traders and investors to conclude that the currency-stability agreement had begun to fall apart. As a result, traders had continued to push the dollar’s value up.

The U.S. Federal Reserve and other central banks began selling dollars Friday after the announcement early in the morning that wholesale prices in the United States had risen moderately in April.

They apparently hoped to compound the effect of what they expected to be a market-driven decline in the dollar. Moderate inflation, they reasoned, would reduce pressure on the Fed to raise interest rates, and stable or falling U.S. interest rates would reduce demand for dollars.

Unaccountably, however, the greenback, now at its highest level since last October, soon recovered. It ended the day’s trading in New York at 136.11 Japanese yen, up from 135.38 late Thursday, and 1.9195 West German marks, compared to 1.9161 a day earlier.

Monetary authorities of the major industrial countries are puzzled--and apparently divided--over the dollar’s current course.

Treasury Department officials want the dollar to edge down from its present level. Otherwise, they fear, the strong dollar--by making imports cheaper for American consumers and U.S. goods more costly abroad--will impede progress toward reducing the U.S. trade deficit.

But officials at the Fed, which shares responsibility for exchange-rate policy with the Treasury, fear that a further weakening of the dollar might aggravate inflation and force them to raise interest rates at home. That, in turn, might threaten a recession.

Fed Vice Chairman Manuel H. Johnson told a meeting of investors earlier this week that “there is no great concern on our side” about the dollar’s high level. The greenback now is at the top of the band that the industrial countries have agreed should be the target range.

Officials of other countries are likewise split.

The Japanese share the U.S. Treasury’s view that the dollar should come down. Satoshi Sumita, governor of the Bank of Japan, said earlier this week that he thought the dollar’s rise had been “excessive.”

Normally Would Decline

But Karl Otto Poehl, president of West Germany’s Bundesbank, indicated in a comment to reporters Monday that his country would not favor a rapid decline in the dollar’s value. Poehl said the dollar’s level would be determined by the markets and that the world would have “to learn to live with” the consequences, even if that meant persistent large trade imbalances.

U.S. officials are stumped about why the dollar is continuing to rise even as U.S. interest rates are easing. Ordinarily, falling U.S. interest rates drive investors to seek securities in currencies other than the dollar and the declining demand for dollars forces down their value.

“The fundamentals haven’t changed, so we figure it must be due to short-term factors,” one U.S. official said. “There’s a lot of noise on the market.”