The United States mounted a massive surprise rescue effort for the dollar Wednesday, working with other major industrial nations in waves of purchases that helped reverse a steep decline in the value of the U.S. currency.
The effort, orchestrated by the Clinton administration, pushed the dollar up in value against the Japanese yen and the German mark.
The fall in the dollar has resulted this year in a steady rise in the prices of imported goods. The resulting threat of possible inflation has made it somewhat harder for the Federal Reserve to consider a reduction in interest rates, even though the American economy appears to be slowing.
Administration officials have also been watching with concern the growing number of indications that the economy may be weak during the 1996 election campaign.
Propping up the dollar in currency markets, if successful, allows the administration to continue confronting Japan while also leaving the Federal Reserve with the option of lowering interest rates at some point.
Even with the rally Wednesday, the dollar is still down 15 percent against the Japanese yen since the beginning of this year.
“The market was leaning toward the bearish side anyway and I think there was the risk of a large sell-off on (the release of economic data later this week), so they were averting a potential dollar crisis,” said Tom O’Malley, a foreign exchange analyst from Technical Data.
The dollar purchases were kicked off by the Federal Reserve, which acts as the U.S. government’s agent. Other countries joining in were Japan, Germany, Britain, France, Canada, Italy, the Netherlands, Sweden, Belgium and Switzerland.
Traders estimated that the Fed spent $1 billion to buy dollars and that the other nations added another $1 billion in the first joint intervention to bolster the dollar since April 5.
The effort was far more successful than three previous attempts this year. In late afternoon trading in New York, $1 was buying 84.44 yen, up from Tuesday’s close of 82.79 yen, and 1.4130 German marks, up from 1.3880 marks on Tuesday.
In announcing the intervention, Treasury Secretary Robert Rubin left no doubt that the United States and its allies were prepared to launch further ambushes in an effort to make traders wary about continuing to bet against the dollar.
“We are prepared to continue to cooperate in exchange markets as appropriate,” Rubin said.
But economists cautioned that it was far too soon to declare an end to the dollar’s troubles.
Many economists forecast continued downward pressure on the dollar.
The twin deficits - in the budget and in trade - have been cited as the principal culprits in the dollar’s troubles.
“The fundamentals haven’t really changed,” said David Gilmore, an economist at Foreign Exchange Analytics in New York. “Intervention alone isn’t enough to turn the dollar around. Policy adjustments have to be made.”
The dollar purchases came shortly after the U.S. government reported that growth in the first three months of this year slowed to an annual rate of 2.7 percent.
The weakening U.S. economy increases the chances that the Federal Reserve will be forced to cut interest rates later this year in an effort to stave off a recession, many analysts believe, even though lower U.S. interest rates will put further downward pressure on the dollar because it will mean less of a return for foreign investors.
A weaker dollar poses an inflation threat for the U.S. economy by making foreign goods more expensive. However, it also holds out the promise of lower trade deficits by making U.S. products more competitive on overseas markets.