Dollar Fends Off Concerted Effort to Beat It Down : Money: The U.S. currency continued strong despite Japan’s interest rate hike and heavy intervention by several major nations.
Another volley in the battle by central banks to blunt the rise in the value of the dollar proved a dud Wednesday as the U.S. currency remained buoyant despite a surprise move by Japan to raise interest rates at home.
Seeking to stabilize the U.S. currency against the Japanese yen, the Bank of Japan unexpectedly raised its discount rate to 3.75% early Wednesday--up half a percentage-point from the 3.25% rate that had prevailed for the previous several months.
At the same time, central banks of the United States, Japan, West Germany and other major European countries engaged in substantial intervention in major currency markets around the world, selling dollars frantically in an effort to drive the greenback’s value down.
The series of moves was the second major assault by finance ministers and central bankers of the seven largest industrial democracies, who agreed at a Sept. 23 meeting to try to stem the dollar’s rise and have been intervening heavily in the markets ever since.
Nevertheless, the greenback continued to defy the central banks’ efforts. When the markets closed in New York, the Japanese yen was back to 144.50 and the West German mark stood at 1.9150--not far from the 145 and 1.9510 levels prevailing before the Sept. 23 accord.
Tokyo’s move followed by only six days a decision by the Bundesbank, West Germany’s central bank, to increase its own discount rate by a full percentage point, also in large measure to help stabilize the dollar.
The Bundesbank action set off a round of similar moves by Britain, France and Switzerland. The discount rate--the interest rate that a central bank charges on overnight loans to commercial banks--is one of the major policy tools that central banks use to signal policy changes.
In each case, however, the interest rate increase had only a brief effect on the dollar’s value. Although Wednesday’s announcement sent the dollar plummeting in Tokyo, the U.S. currency resumed its climb almost immediately, suggesting that the rate hike may prove inadequate.
Robert Brusca, economist for Nikko Securities International in New York, said one reason for Wednesday’s fizzle might be that the interest rate increase by Japan was so small. “It doesn’t give you too much to mug somebody with a marshmallow,” Brusca said.
Currency traders said they believe that unless the Federal Reserve Board reduces U.S. interest rates later this week, both West Germany and Japan will have to raise interest rates even further for the markets to respond as the seven governments wish.
The move by the Bank of Japan also underscored the widening split in the United States between the Treasury and the Federal Reserve Board over whether the Group of Seven--as the finance ministers’ forum is called--should continue trying to peg the dollar.
The Treasury wants to stem the dollar’s rise--or even drive the U.S. currency down--for fear that a continuing increase could impede efforts to reduce the U.S. trade deficit. A high dollar makes imported foreign goods more attractive here and makes U.S. exports more expensive abroad.
But the Fed is opposed to sending the dollar any lower because a higher dollar helps keep inflation in check in the United States. Technically, the Fed should have reduced U.S. interest rates to complement the European and Japanese rate hikes, but so far it has remained conspicuously aloof.
Fed Chairman Alan Greenspan is known to fear that if import prices rise, it would spur consumer prices here and enable U.S. firms to raise their prices. He also is said to worry that the Fed might sacrifice its independence if it accommodates the Treasury too often.
On Tuesday, Greenspan concluded a tour in Moscow, where he was advising the Soviet government, by warning that “attempts to maintain unrealistic exchange rates may lead to destabilizing international capital flows and ultimately may have to be abandoned.”
Although Fed officials insisted later that his remarks were overblown by outsiders, they were widely interpreted as a criticism of the Group of Seven effort to drive down the dollar, and, as such, helped send the dollar’s value soaring again later in the day.
Brusca said he believes he has seen signs that the Federal Reserve may be reducing U.S. interest rates gradually by nudging down rates in the credit markets. He speculated that the Fed might be hoping to push rates down in this fashion without making the dollar more volatile.
In a sharp departure from previous practice, the move by the Bank of Japan came as a surprise and was announced at mid-day in Tokyo, so that currency markets at home bore the brunt of the initial impact. Previously, such changes had been announced after markets closed.
Nevertheless, Satoshi Sumita, the central bank’s governor, said the increase was primarily intended to stabilize the dollar against the yen in hopes of avoiding more inflation. A high dollar makes imports more expensive in Japan and impedes reduction in the trade surplus.
It was mainly at the behest of the U.S. Treasury that the Group of Seven ministers launched their latest dollar-bashing foray. Their statement was followed by several days of massive dollar-selling by central banks in an effort to drive the dollar’s price down.
Traders said the central banks were active again Wednesday, with the Bank of Japan and the U.S. Federal Reserve selling “sizable amounts” of dollars for yen in Tokyo. They said both central banks seemed to sell whenever the dollar rose to 142.75 yen.
Still, some analysts were skeptical that heavy intervention would work at all. “Look at all the effort they’ve expended to get the dollar down and look where it is now,” Brusca said. “It just shows you how fruitless intervention is.”
