WASHINGTON -- The dollar fell again against the Japanese yen yesterday despite assertions by Treasury Secretary Lloyd Bentsen that the United States favors a stronger greenback to boost world economic growth.
But the dollar held steady against other major currencies, and stock and bond markets stabilized. The general calm in financial markets lessened speculation that the Federal Reserve will have to raise interest rates soon to shore up the dollar.
Members of the Federal Open Market Committee meet next Tuesday and Wednesday to review rate policy.
"The best bet is that the Fed will meet and talk and keep an eye on things and not take any action, and I get the feeling that market sentiment has shifted around to that view," said L. Douglas Lee, chief economist for NatWest Markets.
Bentsen went out of his way in a speech Tuesday night to dispel the notion that the United States is seeking to revalue the dollar to gain an advantage in trade with Japan.
"I know there are people who think we have some strategy of driving down dollars, or using the dollar as some kind of bargaining chip," Bentsen said in a speech to the Foreign Policy Association in New York City. In fact, he said, "we believe a stronger dollar is better for our economy and better for the world's economy."
Bentsen made nearly identical comments to reporters yesterday in a briefing on the economic summit that President Clinton will attend July 8-10 in Naples, Italy. The meeting, which will include the Group of Seven industrial nations, was billed by Bentsen as part of an ongoing effort to foster stronger global growth and create jobs.
Analysts said the dollar fell because currency traders worried that a weak Japanese government may not be able to carry out measures to cut Japan's trade surplus and stimulate the economy. The government of Prime Minister Sutomu Hata resigned over the weekend and was replaced by a Socialist-led coalition.
The dollar also sold off on a comment made by Bentsen in New York that he expected the change in government to delay efforts by Japan and the United States to narrow their trade imbalance.
Bentsen yesterday sought to convey an upbeat assessment of markets and the world economic outlook, stressing that industrial nations now appear to be embarking on a recovery together. He estimated that the economies of G-7 nations will grow 2.5% this year compared to only about 1% last year.
"Europe has begun a moderate recovery. They still face 12% unemployment rates, but hopefully that will change, and the sooner the better," said BenBen. "In Japan, we're hopeful that the worst of the slowdown is over. I'm optimistic that over time we'll make substantial progress."
A senior Treasury official said, "The growth strategy we've put in place has been successful. You have a sense of upswing almost everywhere."
Bentsen declined to comment on the Fed's short-term rate policy, but he said he is talking regularly with Fed Chairman Alan Greenspan and the two still agree
on the need to foster long-ten growth while keeping inflation low. "Long-ten interest rates are up because expectations of a stronger recovery have taken hold, but at this point I don't see the rise in bond yields threatening growth," he said.
In afternoon trading yesterday in New York, the dollar was quoted at 98.55 Japanese yen, another post-war low after closing the day before at 99.90. But the greenback was steadier against European currencies, and slightly stronger against the German mark, trading up to 1.5825 marks from 1.5785 at Tuesday's close.
Optimism on the course of the U.S. economy was reinforced by a report from the Commerce Department that gross domestic product during the first three months of the year grew at an annual rate of 3.4%, up from 3% in a preliminary report issued last month.
The report drew little interest in the bond market, which instead is focusing on the dollar, commodity prices, and estimates of how fast the economy is likely to grow during the rest of the year. Many analysts believe second-quarter growth was about as strong as in the first quarter, and that there is plenty of momentum that will induce the Fed to raise rates further.
A panel of 11 bank economists yesterday issued a forecast saying that they expect the Fed to raise the federal funds rate from 4.25% to 4.5% or 4.75% by the end of the year. The economists, members of the economic advisory committee of the American Bankers Association, delivered their forecast in person to Greenspan and other Fed board members on Tuesday.
The panel forecast that consumer prices will rise 2.9% in 1994 and 3.5% in 1995. "We think there will be some signs that inflation is making a bit of a U-turn," said Stuart Hoffman, chief economist for PNC Bank Corp. and chairman of the group.
But the economists agreed that the Fed should not boost short-term interest rates solely to defend the dollar. "The value of the dollar should not dictate monetary policy," said Hoffman.
The panel predicted that the Fed will eventually push the federal funds rate up to 5.25% by the end of 1995. But they saw little movement in long bond yields, predicting that the 30year Treasury bond will average 7.5% in 1995, about the current yield.
The group estimated real GDP will increase 3.2% this year before slowing to 2.5% in 1995, which would be about the pace many economists say can be sustained over time without stirring inflation.