Leading Wall Street economists traced the dollar's latest bout of weakness in the currency markets to a simultaneous worsening in the U.S. inflation outlook and what they see as a deterioration in the government's resolved to do something about it.
And while the Treasury Department and the Federal Reserve Board are, at the president's request, grappling with ways to stem the dollar's fall, the money market economists say that the only sure way to get a grip on inflation that will convince dollar holders abroad and that they do not own a shrinking asset.
The policy difficulty is that the main measures suggested to fight inflation are politically unpalatable, such as a further sharp run-up in interest rates that could throttle the economic expansion, or a drastic slash in the federal budget far beyond what the president or Congress have in mind, or some form of controls of wages and prices that would be abhorrent to both business and labor.
But the economists say that the dollar crisis will continue in the absence of some pretty harsh measures to deal with inflation.
"As we read it, there have been in the last couple of weeks a significant loss of credibility in the anti-inflation posture of the government as a whole," commented Gary Wenglowski, chief economist for Goldman Sachs & Co., the investment banking firm.
At the same time Wenglowski said "The underlying rate of inflation is moving upward." The rate, he said, was now running at 7 to 7.5 percent, and "our models suggest it will move to 8 percent in the next nine months."
As signs of weakness in fighting inflation, he cited a greater timidity of the fed under chairman G. William Miller recently to raise interest rates as well as the administration's muzzling of Barry Bosworth, the head of the Council on Wage and Price Stability, to limit his criticisms of prospective wage settlements in what was perceived as an effort to placate organized labor.
The developments have been read by foreigners he said, to mean "The government is not as stern in fighting inflation as they thought."
"The most effective thing that could be done right now would be for the fed to show a greater willingness to push up interest rates," said Wenglowski. But since even the current high level of interest rates has failed to curtail either consumer or business borrowing very much, he predicted that the Fed would finally have to push the rate on federal funds to the 9 to 10 percent range, long-term bonds to about 9.5 percent, and mortgage rates over 10 percent before such a policy would have an effect.
"The inflation outlook is going to force Miller to go that high," he added.
On Wednesday the Fed pushed up its target on federal funds - which started the year at 6.5 percent - up one-eighth point to 8 percent. And there was some expectation the rate could go higher today if the dollar continues to show the weakness it exhibited following President Carter's press conference yesterday.
Meanwhile, there is widespread anticipation of a rise today in the Fed's discount rate, or what it charges member banks for money.
Henry Kaufman, chief economist for Salomon Brothers, said he expected a boost in the discount rate of at least one-half percent to 7.75 percent, and did not rule out the possibility of an increase to 8 percent to bolster the dollar.
Kaufman meanwhile criticized the conduct of monetary policy in recent weeks for "running behind the events" and "contributing to the weakness of the dollar."
He cited "a series of nuances in monetary policy that have compromised the Fed's anti-inflationary stand," including Chairman Miller's negative vote on the last discount rate increase, a decision to maintain the Fed's money supply growth targets at their same levels, despite a higher base, which means larger growth in the money supply overall, and statements from Miller that the Fed should not overstay a policy of restraint.
But Alan Greenspan, head of Townsend-Greenspan, a New York consulting firm, and the former chairman of the Council of Economic Advisers under presidents Nixon and Ford, said, "There is more expectation of independence on the part of the Fed than exists in reality," and said the main burden of fighting inflation and boosting the dollar lies with the administration.
As Greenspan analyzed the problem, "The market is essentially projecting a differential in the rate of inflation between the U.S. and West Germany and the U.S. and Japan of several percentage points over the next five to 10 years."
With an estimated $400 billion to $500 billion in U.S. currency sloshing around abroad, "what the exchange markets are saying is that the longterm purchasing power of the dollar is highly suspect," he said.
"The only thing significant the President can do that will have a lasting effect on the exchange rate lies in domestic policy," the former government economics advisor added.
"If the president is credibly believed to get the federal budget defecit down and get the financing requirements imposed on the Fed down, that would create a major rally in the dollar, because what it would do is immediately narrow the long-term projected gap in expected inflation rates between the U.S. and West Germany and Japan."
Conceding the political difficulty of significant budget reductions, Greespan commented that. "If nothing is politically feasible, then there is no solution. At some point it has to recognize that what are considered politically acceptable solutions to a problem will not solve it."