WASHINGTON -- The Clinton administration and a dozen foreign countries took the currency markets by surprise yesterday, buying billions of dollars in an intervention that appeared to have stopped yet another slump in the dollar.
After several days of sliding slowly down toward its record lows of mid-April, the dollar bounced back sharply yesterday against the Japanese yen and the German mark. But when trading ended, the dollar had not quite reached the levels that traders said would signal a new stability.
Still, the dollar's recovery contributed to a sharp rally on Wall Street.
Treasury Secretary Robert E. Rubin issued a statement yesterday morning that described the currency market intervention as consistent with a commitment in April by the United States and six other leading industrial nations to bring about an orderly reversal of the dollar's fall.
"We acted in the exchange markets this morning consistent with the exchange rate objectives expressed in the April 25 G-7 communique," he said, referring to the Group of Seven nations. "We are prepared to continue to cooperate in exchange markets as appropriate."
U.S. officials said privately that the administration also wanted to make clear that it would not use a weak dollar as a weapon in the negotiations with Japan in the contentious trade dispute over U.S. automobiles and auto parts. They also indicated that the White House was leaning toward moving up the date of the next round of negotiations in the dispute.
Previous trans-Pacific trade disputes have produced sharp drops in the dollar that have made Japanese goods more expensive and less salable in the United States.
But the fall in the dollar has resulted this year in a steady rise in the prices of imported goods. The resulting threat of possible inflation has made it somewhat harder for the Federal Reserve to consider a reduction in interest rates, even though the U.S. economy appears to be slowing.
Administration officials have also been watching with concern the growing number of indications that the economy may be weak during the 1996 election campaign. Propping up the dollar in currency markets, if successful, allows the administration to continue confronting Japan while also leaving the Federal Reserve with the option of lowering interest rates at some point.
Lawrence B. Lindsey, a governor of the Federal Reserve Board, predicted in an interview yesterday afternoon that the economy would continue to slow down but would not slip into a recession. "We're going to see continued moderation in the pace of growth, but we're going to have growth," he said.
Mr. Lindsey also acknowledged some concerns about the effect of rising import prices on inflation, but emphasized that imports accounted for only a small fraction of the goods and services sold in the United States. "I think it is a matter of concern but I think the numerical effects are relatively small," he said.
The dollar settled in New York late yesterday afternoon at 84.54 yen, up 1.68 yen from Tuesday, after trading as high as 85.28 yen around 9 a.m. after the central banks entered the currency markets.