Fed, Central Banks Overseas Step In to Slow Dollar's Fall

October 30, 1987|JONATHAN PETERSON | Times Staff Writer

The dollar endured another stormy day in the foreign exchange markets Thursday, as speculators throughout the world sought to unload the currency, convinced it is headed for a deeper decline.

The Federal Reserve Board made large purchases of dollars for the second straight day in an attempt to prop it up, but the moves had limited effect in the jittery currency markets. "With all the statements and rhetoric from the Administration and central banks of Europe, the market is very willing to wait for them to really back it up with action," said Ronald Holzer, chief dealer at Harris Trust & Co. in Chicago.

"There's been a lot of talk in stabilizing and supporting the dollar," he said, "but it continues to look more like (the central banks) are only smoothing the downward fall, not holding it at specific levels."

The situation underscores a central dilemma of U.S. policy-makers in the wake of the stock market plunge: Some of the very moves that would strengthen the dollar--higher interest rates, for example--also could chill the economy at a time of growing fears of recession. Yet a severe fall in the dollar would stir inflation and threaten financial turmoil if foreign investors sought to unload the currency.

In New York trading, the dollar closed at 1.7395 West German marks Thursday, up slightly from a seven-year low reached earlier in the day. It finished at 138.75 Japanese yen, up from the 136.80 yen level in Asian trading earlier in the day.

The question of the dollar's value flared into the open this week following remarks Wednesday by a European official that the United States was prepared to let it plunge against the mark. Despite a flurry of denials and clarifications, including a disavowal by Treasury Security James A. Baker III, the remark prompted a stampede to unload the currency. By late Thursday, however, the selloff was slowing.

In the view of many observers, the Administration recognizes that the dollar will fall still further, but seeks as calm an adjustment as is possible in the current anxiety-ridden environment.

"I would assume most of the governments expect the dollar to go down some, but in an orderly way," said Stephen H. Axilrod, vice chairman of Nikko Securities Co., in New York, and formerly staff director for monetary and financial policy at the Federal Reserve. Axilrod added that if the financial markets lost confidence in current attempts to cut the federal budget deficit, there was a chance that the dollar's fall "could get out of control," although he did not expect such a problem.

House and Senate budget negotiators are trying to agree on a plan to reduce up to $23 billion next year from the federal deficit. There were unconfirmed accounts in Washington that Baker would seek a meeting of the seven major industrial democracies to discuss the tense world financial situation if the budget talks, which could end next week, are successful.

Sentiment in favor of such a meeting has increased since the stock market plunge earlier this month, an event that has radically changed perceptions of the world's economic challenges. Prior to the collapse, Federal Reserve policies focused on containing inflation. But the stock plunge forced the central bank to shift its focus abruptly in order to stave off a recession.

Through its recent purchases of Treasury securities, the Federal Reserve has pressured short-term interest rates sharply downward, with the overnight rate banks charge each other for money dropping to as low as 6.5% this week from about 7.5% before the stock collapse.

Analysts said such actions represented short-term crisis management, rather than a fundamental, long-range shift in policy by the Federal Reserve. "I don't think they're going to dramatically revise their policy stance until they get a clearer picture of what the stock market is doing to the economy," said Robert H. Chandross, chief North American economist for Lloyds Bank in New York.

Accord Abandoned?

Gordon Richards, an economist with the National Assn. of Manufacturers, agreed: "This is just a short-term, one-time increase (in the availability of money) to mitigate the effects of the stock market crisis."

A question that continues to seize the currency markets is whether the Federal Reserve and other central banks have abandoned an agreement reached last February in Paris to maintain the dollar at certain, undisclosed levels. The Administration sought the lower dollar--it peaked in early 1985--as a way to cut the trade deficit, because it makes U.S. goods more competitive overseas.

Despite the official secrecy, the floor for the dollar relative to the mark was thought to be approximately 1.80 marks under the Paris agreement, a level shattered in recent trading. Thus even as Baker and financial officials from other nations Thursday reaffirmed their commitment to the pact, they didn't fully convince traders.

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