Preliminary estimates for the first quarter show that the oil cartel is investing even more money in the United States than before, contrary to reports that it is nervously trying to shift out of the dollar, according to Treasury Under-secretary Anthony Solomon.
Solomon cited this as one of several positive elements in the outlook for the world economy before a symposium on the management of foreign exhange risks sponsored by the International Herald Tribune.
He also firmly rejected any proposals to stabilize the dollar either through "substitution" arrangements to sterilize official currency reserves, or through fixing an official rate or "zone" for support of the dollar.
The substitution idea was brought up last month by H.J. Witteveen, managing director of the International Monetary Fund at an interim Committee meeting in Mexico City. The proposal was referred for study to the IMF executive directors.
Solomon's rejection of the idea here was firmer than the diplomatic terms used at Mexico City. He said such proposals treat the symptoms rather than the causes of present economic problems, and any attempts to prevent exchange rates from reflecting basic trends "could be extremely disruptive for the World economy."
Earlier, another speaker at the conference, Prof. Robert Triffin, a Yale University monetary theorist, recommended establishment of "acceptable exhange rates for the dollar" through a form of "mutual defense" that would limit fluctuations.
Triffin said that some international reserve asset, "less absurdly baptized than special drawing rights," should replace the dollar as well as gold in international settlements, and in adjustment of world reserves. Special drawing (SDRs) are a special asset issued proportionately by the IMF to its members.
But Solomon said that, in the U.S. view, a strong and healthy dollar relies on a fundamental economic performance and not on the approaches recommended either by Witteveen or Triffin.
He noted, that about 70 percent of the accumulated surplus of the Organization of Petroleum Exporting Countries cartel had been invested in dollars, of which about 25 percent is in the U.S. market itself. He said that "contrary to some press reports, there is no evidence of an OPEC shift away from dollar investment during recent exhange market disorders."
Other favorable economic signs cited by the Treasury official included a better balance in growth prospects among industrial nations, with a projected drop in the U.S. growth potential this year to 4 1/4 percent, while European and Japanese growth taken together "may reach" 3.5 percent this year, up one-half percent over last year. This "convergence" of growth rates is supposed to reduce U.S. imports, increased U.S. exports, thus reduce the U.S. trade deficit.
Solomon said that inflationary pressures are continuing a slow decline in the developed nations, conceding that only the United States, alone among members of the Organization for Economic Cooperation Development may have a higher inflation rate than last year.
Triffin said in other parts of his address that problems resulting from the existing system of floating exchange rates are due mostly to policy mistakes and to mismanagement rather than to the floating system itself.
He said that in the future, floating rates are most likely "to be partly mismanaged than adequately managed. All that we can probably hope for in the near future is to reduce and palliate the consequences of this mismanagement."
Another speaker, Paul Armington of Forex Research and Wharton EFA Inc., said that econometric models can be used in the joint forecasting of exchange rates and interest rates with good results. The weak spot in the model is in forecasting policy responses and changes, he conceded.
The conference continues today with discussions led by Karl Otto Poehl, vice president of the West German Bundesbank; Michiya Matsukawya, Japanese vice minister of finance; and Christopher McMahon, executive director of the Bank of England.