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Move Expected to Bring Immediate Decline in Dollar

September 23, 1985|PAUL RICHTER | Times Staff Writer

NEW YORK — The leading industrial nations' determination to reduce the strength of the dollar should set off an immediate decline in its value while it helps President Reagan head off protectionist legislation in Congress, economists and political observers said Sunday.

They said that the announced intention to intervene against the dollar in international currency markets would have a clear impact on the two audiences--international currency dealers and members of Congress--that the Reagan Administration most wanted to hear the message when it called the meeting late last week.

"I am encouraged," said Sen. John C. Danforth (R-Mo.), the author of legislation threatening trade retaliation against Japan. "The first thing to recognize is that there is a problem. A few months ago, the dollar was seen (by the Reagan Administration) as something we should take pride in."

The finance ministers of the United States, Britain, France, West Germany and Japan, in a joint statement, said only that they would intervene against the dollar if necessary. But financial experts said that could be as good as intervention itself by warning currency dealers not to buy dollars at their current high level.

'Message to the Markets'

"They've laid down the rationale for more intervention, and that will send a message to the markets," said Robert Hormats, a vice president of the New York investment firm of Goldman, Sachs and assistant secretary of state during the Jimmy Carter Administration. "The question now is, how far it will fall and what the Administration will do to prove it is serious."

C. Fred Bergsten, director of the Institute for International Economics and undersecretary of the Treasury under Carter, said that despite its cautious language, the joint statement is a "broad hint to the world that they're taking a step in a new direction. This seems to indicate a change in policy direction, that they've finally decided to move."

At the same time, observers said that the Administration could quickly lose the initiative--and sacrifice any temporary reduction it achieves in the dollar's value--unless it demonstrates that it has truly abandoned its long-held reluctance to sell dollars in the currency markets.

Although a sharp drop in the dollar's value is likely in the next few days, they said, its value could soon start to rise unless there are signs that the five industrial nations are prepared to back up the language of their announcement Sunday.

Officials Skeptical

They also recalled that Administration officials, including Treasury Secretary James A. Baker III, have been skeptical that such interventions have lasting value. Lawrence Fox, vice president of the National Assn. of Manufacturers, said that Baker told members of his association in July that currency-market intervention "never works, but is hopeless."

"They're climbing down from an ideological tree here, and it doesn't look as if they're going to be doing it gracefully," said Fox, whose group has lobbied heavily for steps to reduce the value of the dollar. "We'll have to see, but our members will certainly feel it marks a step in the right direction."

Hormats said that intervention on a large scale would be without precedent. In January, 10 countries unloaded about $10 billion on the currency markets to try to halt the rise of the dollar. But of that, the United States spent only $659 million in what Hormats described as a "truly half-hearted effort."

Desirable Level

The Group of Five did not specify a desirable level for the dollar, and economists said there is no way to estimate how many dollars the five nations might have to sell to achieve any particular level. If foreign-exchange markets believe the industrial nations are serious in their determination to bring the dollar down, they said, the dollar will fall without spending by the central banks.

Danforth, chairman of the Senate Finance subcommittee on trade, welcomed the Reagan Administration's movement away from its "passive" approach toward trade issues, which he said has allowed Congress to "fill the vacuum" with its own trade initiatives.

But Sen. John H. Chafee (R-R.I.), complained that intervention is "only a temporary expedient. The belief is that these things can be done with mirrors, (but) the problem is the U.S. deficit."

The record budget deficit, by forcing the government to borrow huge sums of money, is widely believed to hold U.S. interest rates high, in turn attracting foreign investment and driving up the value of the dollar.

John Wilson, chief economist with Bank of America, said that any impact of Sunday's statement on the U.S. companies that have suffered from the dollar's strength would not be felt soon. "We can't expect miraculous results," he said. "There's probably a 12-month period before we see any effects on our exports."

But he said that intervention would have the immediate effect of reducing the risk of a sudden, precipitous decline in the dollar's value because it would suggest that the industrial nations want to stabilize the dollar at a sound level. A sudden fall, unchecked by government intervention, could disrupt currency markets and harm world economies, he said.

Contributing to this story were Times Staff Writers John Broder in Los Angeles and James Gerstenzang in Washington.

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