WASHINGTON -- The United States and other major industrial countries yesterday intervened repeatedly and massively in foreign exchange markets in a coordinated effort to prop up the sagging dollar.
The unusual move, announced by Treasury Secretary Lloyd Bentsen, signaled an end to the Clinton Administration's policy of allowing the dollar to drift lower despite the risk of higher inflation.
Analysts said the intervention added to the likelihood that Federal Reserve officials will soon move to tighten monetary policy for a fourth time this year, probably by raising the federal funds rate to 4% from 3.75% and by lifting the discount rate to 3.50% from 3%.
There was speculation that Fed officials, given the tense foreign exchange situation, might seek to adjust policy before the May 17 meeting of the Federal Open Market Committee.
Typically, higher rates make dollar-denominated U.S. assets, including bonds, more attractive to foreign investors. The United States depends on these investors to finance the current account deficit, which has been widening recently and adding to the gloom in the bond market.
Over time, a weak dollar can make the costs of U.S. goods sold abroad more competitive, but it also adds to inflation by raising the cost of imported goods. Conversely, a stronger currency helps contain inflation, and takes pressure off the Fed, although it makes imports more attractive.
Since the beginning of the year, the dollar has fallen by nearly 5% against the German mark and by more than 8% against the yen.
The U.S. intervention yesterday began with reports that the Fed in New York, which acts at the direction of the U.S. Treasury, bought dollars with Japanese yen and again with German marks.
Subsequently, there was a rash of reports of intervention to support the dollar by the Bank of England and by the central banks in Spain, France, Italy, Switzerland, Denmark, Belgium, and Sweden. The Fed, according to bankers yesterday, continued to come into the market again and again, into the afternoon. By some estimates, U.S. authorities intervened as many as a dozen times, spending several hundred billions of dollars in foreign currencies.
"I am concerned by recent developments in the exchange markets," Bentsen said in announcing the intervention. "This administration sees no advantage in an undervalued currency." He added, "These operations reflect or view that recent movements in exchange markets have gone beyond what is justified by economic fundamentals."
Bentsen's description of the dollar as "undervalued" was seen as a clear sign that the United States now wants to see a stronger dollar even though the trade dispute with Japan remains unresolved. "His statement was pretty plain English," said Neal Soss, chief economist for CS First Boston Inc. "The U.S. now effectively wants the dollar higher than it's been."
Bentsen's language was noticeably stronger in tone than his comments last Friday, when he announced a round of intervention by U.S. monetary authorities "to counter disorderly conditions" and "excessive volatility" in foreign exchange markets.
Yesterday's intervention was apparently effective, although some of the initial gains chalked up by the dollar were erased as the trading war between the central banks and the currency traders wore on throughout the day.
In afternoon trading, the dollar was quoted at 101.80 yen, up from an overnight low of 100.77. Against the German mark, the dollar was quoted at 1.6520, up from an overnight low of 1.6330.
Analysts said the effort to shore up the dollar represented a high-stakes international game.
For the United States, the weaker dollar posed the risk not only of higher inflation but a broader loss of confidence by international investors in U.S. financial markets and U.S. leadership in general. For Japan and Europe, which are struggling to get out of recession, appreciating currencies make fostering exports even harder.
However, it remains to be seen whether the efforts at currency manipulation will succeed without commitments by the U.S. and other industrial countries to make adjustments in trade and other economic policies. And there was talk that the intervention was not fully effective, especially against Japan's currency.
"We still have to watch to see what's going to happen," said Robert Brusca, chief economist for Nikko Securities Co. International Inc. "They've done a good job of inflicting pain, especially in Western Europe, but in the yen market, they've basically done nothing. They're shooting with a squirt gun."
David Malpass, international economist for Bear, Stearns & Co., said the dollar's retreat yesterday after repeated rounds of intervention suggested that currency traders were not convinced of the Fed's commitment to keep raising rates. "It's a straight comparison between the Bundesbank, the Bank of Japan, and the Fed about which is likely to be the most inflationary, and the verdict is in -- it's the Fed," he said.
"I think many people are thinking the Fed could pause in its tightening of monetary policy before too long," said Mike Moran, chief economist for Daiwa Securities America Inc. Some analysts think the Fed will hold off on further rate increases after getting the federal funds rate to 4% or perhaps 4.25% this summer.