Pushing the Greenback Around

By Barbara Rudolph

The U.S. dollar had the financial world in a tizzy last week. Buy and sell orders for the currency flooded into markets around the world, propelled by gusts of verbiage that flew between Washington and its major foreign economic allies. Money traders from Sydney to London to San Francisco whipsawed the value of the greenback before it settled down somewhat at week's end, 2.4% higher against major currencies than the week before.

This exercise in dollar diplomacy was evidence that a spirit of economic cooperation, which prevailed only a year ago among the major Western economic powers, has seriously eroded. The basis for the turmoil: sharp differences between the Reagan Administration and U.S. trading partners over how to deal with the nation's huge trade deficit. Rather than concord, said Rimmer de Vries, chief international economist for Morgan Guaranty Trust, "it's open warfare."

Late last week, on the eve of the annual meeting of the International Monetary Fund and the World Bank, the finance ministers and central bankers of Japan, Britain, West Germany, France and the U.S. closeted themselves for more than seven hours in Treasury Secretary James Baker's conference room in Washington to discuss the increasingly painful issue. The aim of the so-called Group of Five was to restore some semblance of unity to worldwide monetary policy. They failed to do that on Friday, but after a 4 1/2 hour Saturday meeting with their counterparts from Canada and Italy issued a bland communique. It said that "cooperative efforts need to be intensified.

The strained mood in Washington contrasted greatly with the atmosphere after a G-5 meeting at New York City's Plaza Hotel in September of last year. There the Western powers agreed to reduce the value of the dollar in concert, and thus try to undercut the U.S. trade deficit. In fact the dollar had already begun to decline, starting in February 1985, but the Plaza pact marked a commitment to continue the trend. From its February peak, the dollar fell by some 30% against other major currencies within 18 months.

The ultimate gambit to reduce the trade gap has not succeeded, at least so far. In theory, a weaker dollar should eventually cut into the trade deficit by making imports more expensive and exports more competitive. Instead, the deficit is running at an annual rate of $175 billion, compared with a record $148.5 billion in 1985.

Baker had for months urged West German and Japanese officials to stimulate their economies, preferably by lowering interest rates, and thus encourage U.S. exports. But he felt his pleas were falling on deaf ears. On Sept. 18, the Treasury Secretary warned that if West Germany and Japan refused to take steps to expand their economies, the dollar would have to depreciate further. His threat started the latest U.S. currency tailspin. Within 24 hours the dollar for the first time in more than five years traded for less than two West German deutsche marks.

America's allies, who would prefer that the U.S. restrain domestic demand by cutting its budget deficit, jawboned back. European finance ministers and central bankers met on Sept. 21 at the Scottish resort of Gleneagles, and word leaked that the Europeans might intervene to prop up the greenback. The dollar thereupon rebounded.

Fed Chairman Paul Volcker roiled the markets further when he appeared on Wednesday before Congress. The dollar may have fallen far enough, he argued, in seeming contradiction to Baker. Responding to the apparent rift in the Administration, traders bid the dollar down.

Just before the G-5 began its Washington session, West Germany's central bank again refused to lower interest rates. Even so, high-ranking financial sources in Bonn told TIME that their country indeed had plans to cut rates, perhaps in early October.

After last week's currency arm twisting, some such gesture might be needed to add a semblance of calm to the world monetary scene. As Robert Hormats, a vice president at the Goldman Sachs investment firm, puts it, "If some greater perception of unity doesn't come out of these meetings, the markets will be in turmoil." Most money traders probably felt that they had had quite enough turmoil already.

With reporting by Jay Branegan/Washington and Christopher Redman/Paris