U.S. unable to halt dollar's slide Dow off 62 Effort to prop up currency deemed lame

June 25, 1994|By New York Times News Service

WASHINGTON -- A multibillion-dollar global buying spree yesterday by the Federal Reserve and 15 other central banks to prop up the dollar in the face of a new onslaught from currency traders failed to prevent the dollar from again slipping against the Japanese yen and the German mark.

The coordinated central bank operation, led by the Clinton administration, initially stemmed the dollar's slide against both the mark and the yen, but only briefly, as the U.S. currency resumed its drop, falling by late in the day to 1.5850 marks, its lowest in more than a year, and to 100.60 yen, just above the record low of 99.85 yen that it touched briefly on Tuesday.

vTC The actual fall of the dollar yesterday against the mark and the yen was small. But what worries some currency traders as well as some U.S. officials is not the size of the decline, but the symbolic statement that the continued slide makes about investors' attitudes toward the U.S. economy now, as well as the fact that traders were not afraid to sell the dollar even in the face of 16 central banks moving in the other direction.

Indeed, the mood among currency traders remained downbeat about the dollar, with many dismissing the administration's defense of the currency as lame.

"Now the central banks are only spitting in the ocean," said William Poole, a Brown University economist. "If they decided to spend $200 billion or $400 billion or some other big number and they announced they had assembled a fund of $1 trillion, or some great big number, then they could raise the level of the ocean and make a difference."

But even giant sums do not guarantee success in the subtle game of currency intervention.

The fact that the 16-nation intervention, which involved about $5 billion in dollar purchases, did not particularly impress the markets would seem to increase the likelihood that the Federal Reserve will conclude that it has to raise interest rates once again, either at the next meeting of its policy committee, on July 5-6, or before then.

By raising rates, the Federal Reserve could further dampen any fears of inflation, as well as make returns on U.S. bank accounts and securities more attractive, so that investors would want to put their money in dollars.

Another interest rate increase would hardly be good for domestic growth. But if intervention is ineffective, the only weapon left to the United States to support the dollar in the short term would seem to be for the Federal Reserve to raise the federal funds rate, the interest rate that banks charge each other, for the fifth time this year.

This short-term rate currently stands at 4.25 percent, after beginning the year at 3 percent. Traders say nothing other than higher interest rates seems likely to impress the currency market, where there still seems to be some feeling that the threat of inflation in the United States justifies another rise in rates.

President Clinton said yesterday in an interview that he and others were puzzled by the dollar's continued decline, given the fact that the long-term prognosis for the U.S. economy is quite healthy.

Mr. Clinton said that "in a funny way the currency values are running in the opposite direction of economic strength."

Currency traders and market analysts say the president may be right about the long-run health of the U.S. economy, but the problem is that in lightning-fast financial markets, there is no long run anymore. For many traders, particularly those who deal in the most liquid asset of all -- currencies -- there is only the short run.

What ails the dollar, traders say, is the coming together of a number of factors that make the yen and the mark relatively more attractive than the U.S. currency.

Germany and Japan are both clearly coming out of recession and both are perceived as having a greater chance of keeping their inflation rates under control.

Also, both those nations have clearly slowed the pace of their own interest rate reductions for now, making their bank deposits and bonds relatively more attractive.

"U.S. assets, relatively speaking, simply don't appeal to the very fleet-footed international investors right now, and they are voting with their feet," said Richard Witten, a currency trader at Goldman, Sachs.

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