The dollar today, plunged to new all-time lows against the Swiss franc and West German mark before bouncing back strongly in a nervous day of foreign exchange trading that was characterized by thin and volatile pre-holiday markets.
At one point the dollar plunged through the Swiss 2-France level in European trading, but closed the day in New York at just over 2.03 francs to the dollar a slight net again. Similarly, the U.S. currency recovered against the deutsche mark, rising to over 2.11 to the dollar after trading as low as 2.0975.
While most financial economists and foreign exchange traders agreed that the year-long decline of the dollar has gone far beyond what fundamental economic and financial conditions would dectate, all cautioned that renewed speculative attacks against the dollar should not be ruled out.
"There is generally a feeling that the dollar is oversold at these levels," one foreign exchange trader said, but added that "no one wants to be caught out on a limb."
"It would be very dangerous to say that we have seen the bottom," one bank economist commented. "Particularly at this moment of time, the markets are extremely thin, and it requires neither a very large volume of selling of dollars nor a very large volume of buying to push the rate fairly sharply in one direction or the other, so it would be very premature to say that the worst is over."
No particularly development seemed to trigger today's early sell-off the dollar. Rather, foreign exchange traders said, commercial participants in the currency markets like multinational corporations and international banks were trying to avoid holding dollars at all costs as the end of the year approached.
Chase manhattan Bank chief international economist Robert L. Slighton said the dollar was the victim of a "bandwagon effect" as currency market participants engaged in what he called "defensive speculation" to prevent getting caught in a major bear market against the dollar, and the process worsening the decline.
"A year from now we will look back to the end of 1977 and say that relative to its trend value against other major currencies, the dollars is under valued," Slighton said. "What I certainly wouldn't be willing to say is that the market is going to turn around tomorrow, or next week, or three months from now," he added. "When the market will change its mood, I don't know."
But most market observers were willing to engage in their own speculation on what could turn the market around, and all seemed to agree that a combination of these three steps by the Carter administration and Congress would stabilize, if not indeed positively rally the U.S. currency:
Direct intervention in the currency markets by the U.S. government to prop up the dollar, a move the Carter administration has repeatedly rejected, to the consternaiton of European central bankers who have been furiously buying dollars to prevent excessive appreciation of their own currencies. But there was some anticipation that with three-day holiday weekends approaching for both Christmas and New Years, the Carter administration might use this quiet period as an opportunity to reverse its laissez-fair stand.
Resolution of the protected uncertainty over who will be chairman of the Federal Reserve Board, either through reappointment of present Chairman Arthur Burns or the naming of a successor as soon as possible by President Carter.
Passage of energy legislation by Congress that would signal some commitment by the United States to bring oil imports under control, a major source of this year's anticipated $30 billion U.S. trade deficit.
The question of whether the U.S. should intervene to support the dollar is particularly controversial.
"The administration has not been entirely foolish for not intervening," said Slighton. "But we're coming into a situation where this is a sufficient amount of hysteria and the rate that might be considered reasonable that I think it would be effective to have some intervention. The U.S. might well say they're intervening because the markets have gotten to the silly stage."
Hiko Tfuji, senior economist in New York for Japan's FUji bank Ltd. said "The U.S. need not support the dollar but should not press other currencies to get stronger artificially," and "should not stimulate speculators."
Tfuji, noting that the dollar traded fairly quietly against the yen today at slightly over 240 to the dollar, closing in Tokyo at 240.70, predicted that the dollar would stabilize in the 240.2 yen area rather than dropping to new lows.
Morgan Guarantey Trust Co's international national economists Rimmer deVries said he was hot necessarily for major intervention by the U.S. government to support the dollar but "somehow Washington ought to show it cares." De Vries said he was bothered by "the confusion that has come out of Washington" on the dollar situation, and he criticized "wishy-washy statements that have been adding to dollar weakness."