Intervention by the United States and other major governments to control the rise of the dollar and the mirror-image slide of European and Japanese currencies continued for a fourth day yesterday and appeared to have had a calming effect on foreign exchange markets.
At the same time, the intervention was having only minimal effects on the actual exchange rates.
At the close of the day yesterday, the dollar was a bit stronger than at the close of business Tuesday, when it was down slightly from Monday. Net, there has been little change.
However, as Federal Reserve Board Chairman Paul A. Volcker told reporters after testifying before the House Banking Committee, trading in the foreign exchange markets has been "much more stable in the last two days."
Volcker, who revealed in a speech to the Trilateral Commission last April 17 that he favored modest intervention to limit extreme fluctuations in the exchange value of the dollar, told the committee that intervention is a tool to be used cautiously.
But he said that at times, it can give "a useful signal," and have "some impact" on the markets. He agreed that intervention is not likely to be effective, even in the short term, if it runs counter to other policies.
Although administration officials again were unwilling, for the most part, to speak about the intervention, there were indications that the effort to hold back the surging dollar had been undertaken with no great enthusiasm.
The intervention appears to have been mostly a response to European fears about the possible "free fall" of the German mark. In the context of the Williamsburg summit promise for "cooperation," officials felt obligated to "do something," a source said.
Actual volume of the intervention--sales of dollars and purchases of other currencies--is believed to be of modest or moderate proportions, and indications are that the administration has no intention of allowing it to go on for a long time.
Informed sources said that intervention by the United States might continue for some additional days, but that they would not expect the process to go beyond two weeks. Privately, administration officials agree with the assessment in private markets that the dollar is too strong to be affected significantly by government intervention.
The attempt to drive down the price of the dollar began Friday when Treasury Secretary Donald T. Regan made the decision that exchange market behavior had become erratic. The United States intervened on its own that day, was joined by West Germany and Japan on Monday, and since then by Switzerland, France and the Netherlands.
Rimmer de Vries, exchange-rate expert at the Morgan Guaranty Trust Co., said the market "should get used to" a strong dollar, despite large American trade and current account deficits.
"It was a nice act of diplomacy after Williamsburg," de Vries said in a telephone interview. "It's had a calming effect, but no one has the illusion that it can turn the dollar strength around."
At the Williamsburg summit, according to a high U.S. official, the heads of government agreed on the need for "convergence" of their economic policies, leading to greater currency stabilization.
"And if our currencies over the long term stabilize more because the underlying economies are more in parallel, we need more cooperation to make sure that erratic markets don't change the perception of that," the official said.
Volcker told the Banking Committee that the intervention hasn't affected the domestic money supply because it has been "sterilized," or offset, by the sale of government securities by the Fed.