The U.S. decision Wednesday to intervene actively in foreign exchange markets was hailed as an extraoridinary success yesterday, not only stemming the decline in the dollar, but also supplying a tonic for strained U.S.-European relationships.
Yet, the most sophiscated analysts warned that the United States had given no sign that it intended to "stablize" the dollar at a given rate - or even within a given range - and that this could mean another testing period soon for the dollar in exchange markets.
The U.S. intention, officials reiterated yesterday, was not to "peg" the dollar rate, but to stand ready to buck the kind of violent fluctuations that drove the dollar to record lows.
In over-simplified terms, the U.S. intervention plan is supposed to slow down the fluctuations in exchange rates, not prevent them from happening. The shifts, in other words, had been too violent, causing what are called "disorderly market conditions."
As on example, the dollar dropped about 20 per cent against the Swiss franc within the space of about 90 days.
"We don't know what is exactly the right rate of the dollar against the Swiss franc," said an expert, "but we do know that a change of 20 per cent in such a short time is not right. We're not trying to find the exact right rate, but to prevent oscillations of that kind."
What some Europeans had been hoping for was a U.S. commitment to defend the dollar, whatever the cost, if it fell below specific levels compared to the West German mark, the Swiss franc and the Japanese yen.
The United States is not prepared to do that for it could be a costly and bottomless pit. Even though officials tried to make that clear at the time of the Wednesday announcement, some European traders apparently tried to convince themselves and other that the U.S. Commitment went further.
In any event, the announcement by the Treasury and the Federal Reserve that the existing $20 billion worth of "swap" funds heretofore available for intervention would be supplemented by almost $5 billion in the Treasury's Exchange Stabilization Fund (ESF) met with a warm reception in key centers in Europe.
"The decline of the dollar [had gone] far beyond what could justified by the facts," said West German Central Bank President Otmar Emminger.
The important thing, Emminger added, is that the United States "is not longer willing to accept chaotic conditions on foreign exchange markets and again will accept responsibility for the dollar."
Similar sentiments were expressed in the money markets in Zurich and Tokyo.
Until Wednesday, the United States had been reluctant to step up the pace of intervention, arguing that the excessive West German and Japanese trade and current account surpluses were pushing up the value of the mark and the yen. These surpluses ought to be reduced by a more rapid expansion within the domestic economies of those two countries, U.S. officials argued. They still feel that way.
American policy makers, however, concluded that the dollar slide had become too precipitate to ignore. Federal Reserve Chairman Arthur Burns and Treasury Secretary W. Michael Blumenthal were in close agreement on what should be done, and Economic Council Chairman Charles E. Schultze reluctantly went along.
No agreement was made to commit intervention funds in any specific amount or for any specific period.
"We'll monitor it on a day-to-day basis," one official told The Washington Post. New York market observers were under the impression that the actual intervention by the New York Federal Reserve Bank yesterday was less than on Wednesday.
"But the Wednesday action turned things around," said a money market man. "It was a tremendous psychological push that probably wiped out a good deal of the speculative "fluff" that had been built up."
Experts yesterday debunked the theory, which had been raised in Europe following the intervention announcement, that there might be substantial losses from the intervention process, or that the United States might have to use gold to redeem the marks and other currencies it has sold in the last few days.
Economist Edward M. Bernstein predicted in an interview that the United States ultimately would make a profit on its swaps of currencies "as the dollar in the long run finds its real value." But even if there were a small loss, he said, it would be trivial compared to "the potential losses in jobs and economic activity coming from wildly fluctuating exchange rates." Gyrations in rates, Bernstein said, disrupt world trade.