Treasury Secretary Donald T. Regan predicted yesterday that the U.S. dollar, unusually strong for more than a year, would weaken a little in the next few weeks, after initial confusion following the realignment of eight European currencies.
His expectation of slight weakening in the dollar reflects a stronger West German mark and some other European currencies that result from the relationships that were shifted yesterday.
But as he noted at a luncheon for reporters, a small dip in the U.S. dollar would give American exports an extra edge, perhaps by 5 percent.
Regan made clear that, in the American government view, the uncertainty about European exchange rates that led to the realignment was caused by a "lack of conformity in economic policy" among European nations. This was a reference to expansionist policies in France, while other nations were still trying to reduce inflationary pressures.
"What this indicates is that there is a need for conformity in the economies" of the major nations, Regan said. This subject, he noted, will be discussed by President Reagan and other heads of state at the economic summit in Williamsburg at the end of May.
After a tense debate, the French government devalued the franc for a third time since President Francois Mitterrand took office in 1981. In recent weeks, there had been a flight from the franc, and French authorities had spent billions of dollars in a fruitless effort to prop up its value in foreign exchange markets.
For most of last week, France had insisted that it would not again take the politically embarrassing step of devaluing, and the West Germans had said they would not revalue--which tends to make its goods more expensive when imported by others.
In the end, the Europeans agreed to a compromise by which the West German mark was revalued by 5.5 percent and the French franc devalued by 2.5 percent, which Regan said yesterday was "less of a devaluation and more of a revaluation of the German mark than we had expected."
For the moment, at least, that shift keeps the eight-nation European Monetary System alive, with the franc effectively devalued by 8 percent against the currency of France's most important trading partner, West Germany, and by lesser amounts against other strong currencies in Europe.
The other EMS currency relationships were changed as follows: Dutch guilder, up 3.5 percent; Danish krone, up 2.5 percent; Belgian-Luxembourg franc, up 1.5 percent; Italian lire, down 2.5 percent; and Irish pound, down 3.5 percent.
The first reaction in exchange markets yesterday--when, according to Regan, there was no central bank intervention--was great strength in the dollar, a natural response to uncertainties caused by the new relationships among European currencies. The French franc plummeted against all currencies, and the British pound, which is not in the EMS, sank to an all-time low of $1.4690, down from Friday's $1.4885. Lower oil prices are a factor weakening the pound. Most of the trading activity centered in New York, because markets were closed partially in Europe because of the realignment.
Ironically, the EMS was formed in 1979 by France and West Germany as protection against the then-depreciating dollar. The idea behind the EMS is to keep the European currencies linked in a relatively tight band of allowable fluctuations.
This relationship has been strained by deep economic problems in France. The French trade deficit is high, and inflation is moving up. Other Europeans blame the result on Socialist policies, including nationalization of industry, which has shaken confidence in the franc.
Regan said yesterday that it is "very clear" that when one nation diverges "from a common policy" there is difficulty in maintaining stable exchange rates. In such a situation, he argued, "it doesn't really matter how much intervention there is."
American reluctance to intervene to keep the dollar from rising too much has been a constant source of friction between the Reagan administration and the French government, which tends to blame the weakness of the franc on high interest rates here and an overvalued dollar.
When informed that French Finance Minister Jacques Delors had said he understood that Regan was "more sympathetic" to intervention by the United States than he had been last year, Regan said: "I'm not sure I'm at that stage yet."
He explained that deputy finance ministers are still studying a report on market intervention that had been commissioned by the economic summit last year at Versailles. He said his position had not changed basically from a view that intervention is not justified "except where there are major currency imbalances."