A high Treasury official said yesterday that the underlying "tone" of foreign exchange markets has vastly improved since the dollar-rescue package was put into effect las November. As a result, the official said, there "no longer is a knee-jerk reaction to sell the dollar on most every item carried over the wire services."
Anthony Solomon, under secretary of the Treasury for monetary affairs, in a speech in New York to the Foreign Exchange Association of North America, said the market is being stabilized by a greater sense of "two-way risk."
Coincidentally, a West German move yesterday to boost internal short-term rates-a step that might have weakened the dollar at naother juncture-was absorbed without difficulty.
In his speech, Solomon reviewed the events that led up to the November 1 package, including the need "to jolt market psychology out of the exxtreme bearishness that seemed to have taken over." The package assembled $30 billion in U.S. resources to intervene in markets to prop up the dollar.
He re-iterated the U.S. commitment to deal firmly with the problems of inflation and the current account (trade and services) deficit, and to assure "more moderate but sustainable growth."
In pasisng, he admitted the recent increases in world oil prices will offset a part of the improvement that otherwise would have taken place in the U.S. current account deficit this year. But he suggested that effective conservation efforts by major cnsuming countries could reduce the amount of oil surcharges the cartel can collect.
Solomon announced that U.S. moves had "substantially improved our own net position in foreign currencies. Factoring in the proceeds of our foreign currency note issues and other acquisitions of currency, the United States now has more resources immediately available for current(intervention) operations than we did just after November 1."
He noted that opinions "in the street" differ on the possible course of exchange rate movements over the rest of the year.
"But I am intrigues as much by the flavor of te comments as the predictions themselves," Solomon said. "Expectations do not seem to be held with any great conviction, perhaps because the past few months have been a chastening experience for a number of people."
The move yesterday by the West German central bank raised key lending rates a full percentage point in an effort to control domestic infltion and what was described as excessive expansion of bank credit.
The discount rate was raised from 3 percent to 4 percent, while the Lombard rate (the rate for very short term funds) was boosted from 4 to 5 percent.
The result, officials here said, will be to narrow the average existing 6 percentage point differential between the highes U.S. rates and German short term rates to a little over 5 percent.
From an international standpoint, the significance of the German move was that it was taken inanticipation that the dollar was strong enought to sstain a narrowing of th e interest differential. In other circumstances, exchange markets might have pushed the dollar down, anticipating that capital flows into the U.S. would fall off.