Central banks in four European countries took advantage of a weakening dollar to cut their discount rates yesterday by up to 1 percent in a bid to break out of the doldrums of deep recession and declining world trade.
West German and Austrian central banks dropped their discount rates a full point effective today while Switzerland and the Netherlands announced cuts of one-half percent.
Yesterday, the dollar dropped sharply again, in anticipation of a possible cut in the U.S. discount rate soon. The German mark was traded at 2.4335 to the dollar in New York yesterday, compared with 2.59 in mid-November.
Bankers and economists speculated that the European banks were encouraged to make their move when the dollar dropped 5 percent against the German mark and 15 percent against the Japanese yen since mid-November despite a slight increase in U.S. interest rates.
"It was a strong psychological signal that showed interest rates aren't everything," explained Robert Lawrence, an economist at the Brookings Institute. "The markets are beginning to respond to other factors, like a huge U.S. trade deficit."
The U.S. trade deficit is expected to reach $33 billion this year but will probably grow as large as $54 billion in 1983, according to Richard Scott-Ram, vice president for economic research at Chemical Bank.
Other bankers also noted that the dollar's strength has been attenuated by a decline in the price of oil and other commodities purchased in dollars. In addition, the rush into dollars has slowed with the relaxation of fears that countries like Poland, Mexico and Brazil might be forced to declare bankruptcy.
"The fall in the dollar comes at an important time because a lot of people were predicting that it would surge in value through the end of the year," said Ann Parker Mills, a financial analyst with Irving Trust in New York.
"The reversal definitely seems to be related to a changing market psychology toward the dollar, because in the past even when the U.S. cut its interest rates the dollar remained high," she said.
While the dollar's slide was welcomed, economists are still concerned that the prospect of enormous budget deficits could force the U.S. Treasury to borrow such vast sums that interest rates would soar once again, attracting a new infusion of foreign investors to the dollar.
European countries have been eager to take steps to reflate their economies and combat unemployment for months, but until now the lingering strength of the dollar has inhibited policy shifts that might harm their exchange rates.
The coordinated timing by the four European countries in cutting their discount rates indicated a belief that "the only way to get of their bind was to do it together," said Lawrence.
Nonetheless, France and England, whose currencies have been under intense pressure to devalue against the German mark, apparently could not afford to risk further depreciation even though their unemployment problems are severe.
Economists viewed the drop in discount rates by countries with currencies strongly linked to the German mark as an optimistic sign that a small bloc of nations might be able to break the downward spiral of recession that afflicts all major European economies.
"There is an awareness in Europe that unemployment is a universal problem and momentum toward a recovery has to start somewhere," said Lawrence. "The 'German-bloc' economies seem to be in the strongest position to pull the others out of recession."
A lasting recovery for the West, however, still depends on sustained growth in the U.S. economy and the avoidance of protectionist measures that have accelerated a fall in world trade volume in the past two years.