Fed tries to rescue dollar

November 03, 1994|By New York Times News Service

WASHINGTON -- The Clinton administration went on a billion-dollar global buying spree yesterday to prop up the value of the dollar. It succeeded, at least for now, in reviving the currency after it had fallen to a new post-World War II low against the Japanese yen.

But other nations did not appear to join in the effort, and there were signs late in the day that the markets were questioning a declaration by Treasury Secretary Lloyd Bentsen that the "movements in the dollar are inconsistent" with the strength of the U.S. economy.

By the end of the day, the dollar was trading in New York at 97.63 yen, up from a record low early in the day of 96.12 yen and from 96.60 yen on Tuesday. Against the German mark, it surged more than two pfennigs, to 1.5146 marks.

But traders said they thought the weakness of the dollar would continue unless there were even stronger indications that the Federal Reserve will raise short-term interest rates again, making the dollar more attractive to overseas investors.

The effort to shore up the currency, directed by the Treasury, came at a politically crucial time for the administration.

The weakness of the dollar -- and the underlying message that the markets fear the Fed has not moved quickly enough to choke off the threat of inflation -- could undermine President Clinton's effort to convince voters that he should be given credit for deft management of the economy.

The effort also comes just before two summit meetings with two major blocs that are among Washington's largest trading partners. This month, Mr. Clinton plans to meet with Asian leaders in Jakarta, Indonesia. A meeting is to follow in December with Latin American leaders.

Some market analysts viewed yesterday's move as exquisite timing, a step that took traders by surprise and succeeded in sending the dollar bouncing back strongly.

But others saw it as a doomed effort to stop a flood with a hastily constructed dam made of sticks. These analysts predicted that the billion or so dollars purchased yesterday with reserves of foreign currency held by the Fed -- the exact amount cannot be precisely gauged for weeks -- will be washed away in the $1 trillion generally traded each day in the world's currency markets.

Indeed, that is what happened after the three previous big interventions by the Fed this year.

Mr. Bentsen sounded a theme yesterday that he has repeated several times in recent weeks: Classic economic theory calls for a strong economy to be reflected in a strong dollar, and, in time, the speculators betting against the dollar will lose.

"I believe that recent movements in the dollar are inconsistent with the fundamentals of a strong investment-led recovery in the United States and the greatly enhanced ability of U.S. firms to compete around the world," the Treasury secretary said yesterday morning.

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