WASHINGTON -- The dollar tumbled again in foreign exchange markets yesterday as traders concluded that President Clinton and leaders of other industrial nations are not committed to shoring up the U.S. currency.
Members of the Group of Seven nations ended their weekend summit in Naples without mentioning the dollar in their final communique.
Foreign exchange markets also took comments by Clinton as signaling a U.S. unwillingness to lead any corrdinated intervention by central banks.
"The foreign exchange market has got to be put on notice, and that has not been forthcoming," said Kevin Flanagan, an economist with Dean Witter Reynolds Inc. "We have a currency problem. It's across the board."
In afternoon trading in New York, the dollar was quoted at 1.5262 German marks -- a 20-year low -- and at 97.45 Japanese yen, which was down from a Friday close of 98.05. The selloff began in Asian markets and continued in European markets, capped by an afternoon downturn in New York.
Clinton told reporters covering the economic summit that he believed the dollar would hold up because the U.S. economy is fundamentally sound, with low inflation. He also said that intervention would not do anything in the long run and that the dollar is not out of line historically with the mark.
Those comments, coupled with a lack of intervention by central banks, were seen as signaling U.S. indifference to the plight of the dollar. Moreover, analysts noted, the dollar's big fall against the mark suggests that the U.S. currency is experiencing a broader problem that goes beyond the trade deficit with Japan.
"It's spilling over to the bond market, and that's not healthy," said David Gilmore, a partner with Foreign Exchange Analytics. "You've got an administration that essentially has thrown its hands up in the air on defending its currency and issued an open invitation for an attack on its assets."
Analysts said without intervention, the U.S. and foreign governments are left with changing interest rates to strengthen the dollar. For the moment, however, that option does not seem to be on the table. The Federal Reserve has so far held off on raising short-term interest rates following last week's strong employment report for June, while Clinton and his aides have been saying they do not think a Fed move is justified.
"Normally, a weak dollar would be another cause for the Fed to tighten policy, but not with all the political jawboning in Washington coming out of the Clinton Administration," said Sally Kleinman, a money market economist with Chemical Securities Inc.
Analysts agree that the huge foreign exchange market, in which as much as a trillion dollars in currencies may be traded in one day, is a tough place to challenge market sentiment by intervening. Still, they said, G-7 intervention moves so far have been modest and halfhearted.
After the Plaza agreement in 1985 by the U.S. and its allies to devalue the dollar, central bank intervention went on for weeks, said Gilmore. Now, he said, "it's really a period of testing wills, and the market is looking to find the pressure point, or the threshold of pain, that will draw out the central banks, led by the Fed, in a round of coordinated dollar-buying."
