Fed rescues dollar as its value plunges

April 30, 1994|By New York Times News Service

WASHINGTON -- The Clinton administration intervened in foreign exchange markets yesterday to prop up a sagging dollar and faltering investor confidence that was already pushing interest rates higher at home.

The Federal Reserve bought dollars and sold yen as the dollar tumbled to near its lowest point against the Japanese currency since World War II.

It also sold marks for dollars as the American currency seemed to accelerate its slide against the German currency. The dollar stabilized against the yen and the mark quickly after the intervention.

Since Tuesday, the weakening dollar has helped send long-term interest rates soaring. The yield on the 30-year bond ended at 7.31 percent yesterday, up from 7.10 percent Tuesday.

For the administration, which is depending on low interest rates to fuel the economy, a sharp rise in long-term rates would undermine its goals.

Investor confidence is a fragile commodity, and if it is lost, financial markets can turn sour quickly. Some currency analysts said that the administration's apparent willingness before yesterday to let the dollar continue to drop against the yen had been fostering concern.

In addition, they said that the 4 percent slide of the dollar against the German mark in the last three weeks was a signal that some investors were losing confidence because they were selling dollars despite the attraction of better U.S. economic growth than growth in Germany.

"The dollar had fallen into the crisis zone," said John P. Lipsky, chief economist at Salomon Bros. "There was evidence of deteriorating investor confidence in the dollar, because some investors had concluded that the administration was content to see the dollar weaken in order to pressure Japan in the trade negotiations."

In a highly unusual move that emphasized the importance of the market intervention, Treasury Secretary Lloyd Bentsen announced the move publicly, saying: "U.S. monetary authorities intervened today in foreign exchange markets to counter disorderly conditions.

"This is in line with our previously articulated policy that recognizes that excessive volatility is counterproductive to growth."

The Federal Reserve started buying dollars yesterday morning as the currency suddenly plunged against both the mark and yen. The dollar was on the verge of collapsing through the 100.35 yen level, the post-World War II low that was set last August.

But the dollar also fell against the German mark to 1.64 marks from 1.66, a big move for one day -- especially when the fundamentals of the U.S. economy appear to be sound.

By the end of trading in New York, the dollar was at 101.70 yen, up from 101.36 Thursday. Against the mark the dollar was 1.6540, up from its morning level but down from 1.6622 the day before.

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