For the first time since the Williamsburg summit agreed on the procedure, the United States, Japan, West Germany and Switzerland are managing a "coordinated" intervention in currency exchange markets to halt or slow down the rise of the surging dollar.
The dollar has been soaring to record levels against the yen and key European currencies. For the first time in history, one dollar bought more than 8 French francs on Monday, and was at the highest level against the mark in nine years.
Central banks intervene in an effort to push the value of the dollar down by selling dollars and buying other currencies. Officials would not reveal how large the operation has been, but the Treasury's assistant secretary for public affairs, Ann McLauglin, termed it a "healthy" or "goodly" amount.
It is not yet clear how long the intervention will continue. McLaughlin, who said that the United States had intervened on Friday and Monday, would not say whether it continued to intervene yesterday. "We're not prepared to discuss this on a day-to-day basis," she said.
But the Swiss National Bank, in announcing that it had joined in the process, yesterday referred to intervention by all four of the partners. Japan and West Germany intervened for the first time on Monday.
The extraordinary rise of the dollar, especially in the past year or 18 months, is attributable largely to record high real U.S. interest rates, coupled with economic uncertainties in the rest of the world that have made the United States a relatively safe haven for investors.
The immediate trigger for intervention, according to Treasury officials, was the latest burst of dollar strength that carried it up 4 1/2 percent against the mark and 2.2 percent against the yen in the 10 days prior to last Friday. These are extraordinarily wide movements for such a short period.
McLaughlin said that Treasury officials telephoned their opposite numbers in Bonn last Friday, and told them the United States had concluded that exchange markets had become disorderly, and that the Federal Reserve Bank in New York, acting for the Treasury, would intervene that day. The main concern in Washington was the weakness of the mark, the main currency of the European Monetary System.
Observers suspect that the most recent jump in the dollar was touched off by a combination of factors, including testimony by Fed Chairman Paul A. Volcker suggesting the possibility of a new rise in interest rates, administration predictions of a $100 billion trade deficit next year, and announcement last week of a record $15.75 billion Treasury refunding, which began yesterday.
From its beginning, the Reagan administration has followed a policy of intervening in the foreign exchange markets only on rare occasions, in the belief that regular intervention is a useless procedure that can not counter the underlying economic conditions. The last intervention was Oct. 4-6, 1982, when exchange markets were jittery over the Third World debt crisis, among other things.
The administration has been sharply criticized for its reluctance to intervene by its European allies, who argue that, because of the higher interest rates that underlie the overvalued dollar, one of two things must happen in their own economies:
Either capital flows out from Europe to more attractive investments here, or they must raise their own interest rates at home, which reduces their ability to expand their own economies and cut their burdensome rate of unemployment. In fact, some of both negative results have happened.
U.S. manufacturers also have been persistent critics of the high dollar exchange rate, arguing that it has cost them dearly in sales abroad--and hence resulted in the loss of hundreds of thousands of U.S. jobs. Many economists believe that the promise of no intervention encourages wild swings in exchange rates.
Because of these broad criticisms of U.S. policy--a virtual nonintervention commitment except for rare occasions such as the day of the attempted assassination of President Reagan--the administration agreed at the Versailles summit in 1982 to a study of the pros and cons of intervention.
Published just before the Williamsburg summit a few months ago, the report agreed with the administration's contention that massive intervention over a long period of time is counterproductive. But the report also admitted that there are times when a coordinated multilateral intervention is useful to counter disorderly market trends.
At the conclusion of the Williamsburg summit, a high Reagan administration official summed up a modified American stance this way: "On intervention, we agreed to cooperate more, and to consult more."
Officials were reticent to discuss the current situation in that context. Nonetheless, it is clear that the responses in agitated currency markets last week fit the modified pattern for intervention that high officials had said was agreed to at Williamsburg, including greater personal telephone communication.