Since the matter half of July, the major countries have engaged in two rounds of well-publicized intervention to support the dollar on exchange markets, and perhaps a round or two of more limited action.
The reasons for intervention in this period, and for the timing of particular forays, are obscure at best.
The most recent intervention, Aug. 11 - pitting a broad array of central banks against the market - was apparently undertaken at U.S. initiative, or so say market rumors. U.S. authorities may have feared that a continued lack of official intervention in a sof market would be taken as a signal that the market was free to drive down the dollar if it wished.
Political, Financial Worries
That would have complicated the large Treasury refunding then in progress, perhaps worried the U.S. stock market, and tended to raise issues of confidence in a politically sensitive time.
A shift toward monetary easing outside the United States - and particularly in Europe - would be a much more appropriate and effective way of forestalling an excessive drop in the dollar than would intervention. And certainly U.S. montary policy should not be adjusted to counteract downward pressure on the dollar.
Whatever the specific reasons for recent interventions, the basic question, of course, is whether officials should be concerned about the dollar. And if so, what can, or should, they do about it? They must remember that intervention is usually considered to have limited effect unless but-tressed by appropriate monetary or fiscal policy adjustments.
The role of exchange rates in national policy has long been a matter of great contention. In this debate, advocates of freely fluctuating exchange rates are often placed at one extreme, and they tend to ignore rates in setting policy. At the opposite extreme are those favoring fixed exchange rates; they necessarily place a much greater weight on exchange markets in domestic policy.
Finding a Middle Way
In my view, a practical exchange-rate policy should be at neither extreme but in a zone somewhere in between - in the hope of getting the best, and avoiding the worst, of both possible worlds.
From an international policy perspective, the idea of keeping rates within a zone of reasonable fluctuation does force governments to consult in an effort at least to avoid mutually negative macroeconomic policies. At the same time, though, the breadth of a fluctuation zone does give domestic policymakers latitude needed for orienting policies to domestic needs.
At present, from the viewpoint of U.S. policy, there is probably little to fear from a drop in the dollar. In the first place it is likely to be self-limiting and stay within a zone of tolerance, given the basic improvement in the international competitive position of U.S. industry.
About the only reason for the dollar to decline over the near term is the high short-term cost of holding dollars as compared with, for example, European currencies. A three-month German-mark instrument pays almost 6 1/4 percentage points more than a similar dollar instrument.
Dollar Decline Ignorable
That disparity has for the most part already been built into exchange rates, though some fear that the disparity may widen.
In view of the current parlous state of our domestic economy, the possibility of some decline in the dollar should not influence judgment on whether to ease monetary policy further.
With few domestic sources of economic stimulus available to the economy, the favorable impact on U.S. exports of a lower dollar should even be welcome. And in today's market, a lower exchange rate holds hardly any practical inflationary implications.
In general, I would think European countries have most to lose from a decline in the dollar. It would weaken further the international competitive position of many countries trying to cope with sluggish domestic economies.
European Monetary Interests
Moreover, it would worsen tension within the European exchange rate mechanism, where a tight German monetary policy is in any event exerting barely tolerable upward pressure on the exchange and interest rates of other countries.
Under those circumstances, if foreign currencies began to appreciate significantly, it should be an incentive for monetary authorities abroad to shift more quickly from fighting inflation to encouraging expansion.
Economic weakness in the major industrial countries is holding back both the U.S. and global economies. A shift toward easing in monetary policies outside the United States might even spark a dollar rally, since it would help impart a needed dynamism to the U.S. economy.
Mr. Axilrod is vice chairman of Nikko Securities Co., New York.
