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Dow Rises 76.42 as Dollar Gains : Currency Up as Fed Joins Heavy Buying

January 05, 1988|TOM REDBURN | Times Staff Writer

WASHINGTON — The dollar rose sharply Monday in response to heavy purchases of the U.S. currency by the Federal Reserve and other central banks as European economic officials mounted a high-profile campaign to convince traders that the dollar has fallen far enough.

The rise of the dollar fueled a strong rally in financial markets, sending the stock market sharply higher.

In apparently attempting to preempt a possible attack from currency traders after the relatively quiescent holiday period, the Federal Reserve joined other central banks in Europe and Japan to stop the greenback from falling below 120 Japanese yen. Traders said that the Fed even took the unusual step of intervening in the Tokyo currency market to help support the dollar there.

Boundaries in Mind

The French and British finance ministers, in separate interviews published Monday by leading financial newspapers, suggested that the seven leading industrial democracies are determined to keep major currencies trading within certain boundaries.

French Finance Minister Edouard Balladur said that the latest seven-nation currency stabilization agreement reached just before Christmas "contains unpublished clauses" detailing what actions central banks will take to stabilize the dollar within specific, undisclosed levels.

In late New York trading, the dollar was being quoted at 122.60 yen and 1.5860 German marks, up from its levels during trading on Thursday of 121 yen and 1.5680 marks. Some of its gains in early trading were lost after a specialized wire service--Market News Service--reported that an unidentified senior Fed official still believed that the dollar would fall further. The Fed, following practice, refused to comment on the unconfirmed report.

The Dec. 22 currency stabilization pact, treated by traders as little more than a vague statement of support for the dollar, was endorsed by finance ministers and central bankers from the United States, Japan, West Germany, France, Britain, Italy and Canada. The statement by the Group of Seven said that "excessive fluctuation of exchange rates . . . could be counterproductive" and its members agreed "to cooperate closely in monitoring and implementing policies . . . to foster stability of exchange rates."

But currency traders have remained skeptical about the commitment of the Reagan Administration to the new agreement. Although Europeans clearly want a stable dollar to help keep their exports to the United States from rising sharply in price and becoming less attractive here, U.S. officials have been sending out contradictory signals about the Administration's position on the dollar.

The dollar has fallen more than 50% from its peak in early 1985. The weaker currency has helped make U.S. goods more competitive in world markets but it has also raised fears among investors that the government will allow inflation to surge out of control in the future. Those fears have had a negative impact on financial markets.

At the heart of the U.S. dilemma is a fundamental policy disagreement over whether the dollar needs to fall further--making American goods less expensive in comparison with foreign products--to help shrink the nation's trade deficit.

Risk in Defending Dollar

With U.S. exports rising strongly for more than a year, most officials hope the trade figures finally will reflect that underlying improvement this year and the dollar will stabilize without any major policy changes. But officials inside the Administration are fearful of the danger of defending the dollar if it requires the Fed to step in by pushing up interest rates, a move that runs the risk of toppling the U.S. economy into a recession during this presidential election year.

"The markets perceive a basic inconsistency in the Administration's approach to the dollar," said David M. Jones, senior economist for Aubrey G. Lanston & Co. in New York, a major government bond dealer. "Politics seems to be dominating policy, which worries foreign investors no end. That's where the rub is."

Most traders contend that government actions are far less important for the dollar at this stage than the trade figures that are scheduled to be released at the end of next week.

The dollar is likely to stabilize for a while in currency markets if the next report shows that November's trade deficit dropped significantly from the record $17.6 billion chalked up by the United States in October. But traders argue that government officials will be nearly powerless to prevent the dollar from sliding if the trade deficit remains close to its record level.

"Whether they can hold the line at 120 yen depends on whether we get a decent trade number," said Stephen Axilrod, vice chairman of Nikko Securities in New York and a former top Fed monetary official. "If the trade number is as bad as $17 billion again, there's nothing in the world they could do to defend the dollar to the death."

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