Keeping the Dollar in Line

COLUMN

`THERE is very little they can do,'' says investment banker Robert Hormats, speaking of the Group of Seven and the United States dollar. Those seven industrial democracies pledged themselves again over the weekend to attempt to keep the dollar from rising further. But the volume of trading on the world's foreign-exchange markets is so huge that intervention by central banks has only a limited impact on prices.

``We don't control the markets,'' admitted Michael Wilson, Canada's finance minister. It is the foreign-exchange markets themselves - not the Group of Seven or their central banks - which set the price of the dollar against other currencies.

That hasn't prevented the central banks from trying to influence the dollar's level. The Federal Reserve Bank of New York reported this month that it had attempted to stabilize the dollar by buying $7.2 billion of Japanese yen and $4.7 billion of West German marks from May through July.

The US is concerned that if the dollar remains strong, it will discourage exports and encourage imports.

Indeed, the International Monetary Fund warned Sunday that the US current account deficit could increase from a projected $125.1 billion this year to $138.7 billion next year.

There's no sign yet of such deterioration. The $7.6 billion trade deficit in July was the smallest monthly deficit since December 1984. Projecting the January-July deficit through the final five months of this year would produce a $105 billion deficit for all of 1989, a decided improvement over 1988.

However, the balance of payments includes other factors besides the trade balance. One of these is the return on foreign investments. Because of a long string of trade deficits, the US has become the world's largest debtor nation. The cost of servicing those debts now exceeds the return on US investments abroad.

In a statement, the ministers of finance and central bankers of the Group of Seven (the US, Japan, West Germany, Britain, France, Italy, and Canada) employed the usual jargon in discussing the dollar. They ``considered the rise in recent months of the dollar inconsistent with longer run economic fundamentals.''

Usually, economists hold, a country with a huge trade deficit should see its currency weaken to improve its competitive position in world commerce. However, the US has managed to attract enough foreign investment to offset that trade imbalance.

Finance Minister Wilson spoke of the ``political attractiveness'' of the US for investors. During the political turmoil in China last spring, many foreigners put money into the US as a kind of insurance.

The Seven also ``agreed that a rise of the dollar above current levels or an excessive decline could adversely affect prospects for the world economy.''

At recent G-7 meetings, participants have established a secret trading range for the dollar against the yen and mark. If the dollar moves above or below that range, the central banks are likely to intervene in the markets in an attempt to keep it within the range.

A dollar is now worth about 145 yen and nearly two marks, a level assumed to be above the previous G-7 secret trading range. The press assumes that the range had been moved up to take account of reality.

Mr. Wilson and the finance ministers and central bankers of other nations are usually extremely careful in talking about the dollar. They don't want to be blamed for prompting either a boom or bust in its value.

New data indicate that trading on world foreign-exchange markets has more than doubled in the past three years to an average daily volume of more than $500 billion. So the $11.9 billion of US intervention over three months - even if supplemented by billions from other central banks - cannot hope to stop any solid run in the dollar.

Because of those numbers, Mr. Hormats, a vice president of Goldman, Sachs & Co., expected the G-7 officials to be looking at the direction of the economies of its members for a solution to the strong dollar problem.

If the US economy weakens further, the Federal Reserve would likely lower interest rates. Abroad, Japan and Germany are trying to restrain booming economies. There was speculation last week that the German Bundesbank might raise interest rates. If it does, dollar investments would be less attractive and the dollar could weaken - without foreign-exchange intervention.

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