An unusual coordinated intervention by major European central banks yesterday battered the U.S. dollar, which until this week had been enjoying an unprecedented advance in foreign exchange markets.
At the end of a turbulent session, the dollar had plunged by record amounts in a single day against the German mark and the French franc and ended up lower against the British pound and other major currencies. But the dollar stabilized, and came back briskly at the end of the day.
At one point yesterday, the dollar had plunged to a low of 3.18 marks from 3.3950 on Tuesday (after having hit an all-time high of 3.4780), and 3.4430 on Monday, reflecting anywhere from $500 million to as much as $1 billion in dollar sales by the German Bundesbank. It recovered to close at 3.3247 marks.
In New York, the dollar closed at 10.13 French francs (after earlier moving as low as 9.66 in Paris, compared with 10.375 francs Tuesday and 10.535 on Monday).
And the British pound, battered for weeks, rose to $1.0885 from $1.067 Tuesday and $1.0532 Monday, which was an all-time closing low.
By unloading an estimated $1 billion to $1.5 billion worth of dollars in the foreign exchange markets, six central banks convinced traders "that what had been a one-way speculative market was really a two-way street," said former State Department official Robert D. Hormats, now a vice president of Goldman, Sachs & Co. of New York.
The banks involved were those of West Germany, Britain, France, Italy, Austria and Belgium.
To some extent, the central banks of the Scandinavian countries also appeared to be involved.
Hormats said in an interview that "the Europeans banded together, and decided it was the right time to hit the market. What's impressive is not so much the volume of intervention, but the fact that they worked together. Unity has a considerably greater effect than any of them working alone. This way, they've really given the market a strong signal."
The timing of the intervention appeared to be just right -- coming after some weakening of the dollar toward the end of the preceding day, and some uncertainty about American policy, generated by testimony Tuesday by Federal Reserve Board Chairman Paul A. Volcker.
Against the spectacular rise of the dollar since 1980, measured variously at 40 to 70 percent against major currencies -- depending on the base and the method used -- the decline was a small adjustment, and European currencies remain seriously depressed against the dollar.
Wall Street read the spectacular plunge of the dollar that began late Tuesday as a predictable, more or less inevitable, bursting of a speculative bubble.
"The dollar had had such an extraordinary run, it couldn't maintain that trajectory," New York economist Henry Kaufman said. "So for the time being, intervention helps. But it's not an antidote to the real problem. Ultimately, the question is how to deal with the fundamentals."
Few were ready to predict that the dollar would continue to slide, even if the European intervention were to continue for a time, which is widely expected. One London dealer was quoted as saying that there still is demand for the dollar. Every time the dollar falls one more pfennig, he added, "more buyers come out of the woodwork."
There was no evidence that the United States had joined in the intervention process, but Treasury Secretary James A. Baker III, alerted by reporters that Volcker in new testimony yesterday said he saw a useful role "at times" for "forceful intervention," responded that prevailing American intervention policy allows enough scope for future vigorous "forceful" action.
Baker last week had said that U.S. intervention policy had been broadened beyond a willingness to take action only when markets are judged "disorderly," but had insisted that the change was only a "moderation in tone." Yesterday, he seemed to be expanding the potential scope of U.S. intervention an additional notch.
On Tuesday, preceding the initial wave of declining dollar exchange rates, Volcker had said that intervention action to stem the dollar's climb was not forceful enough. This was read by some as a criticism of American intervention policy, which is carried out by the Fed on a directive from the U.S. Treasury.
Volcker also had said that the strength of the dollar had become a "moderating influence" in the formulation of monetary policy, the implication being that the Fed would have moved toward tightening up had it not been concerned that higher interest rates would push the dollar even higher.
Yesterday, Volcker said that the rise of the dollar "doesn't look consistent with equilibrium in our trade position."
He repeated his conviction that the major corrective is a reduction in the U.S. budget deficit, and actions in some unspecified foreign countries to stimulate their stagnating economies. And he strongly attacked the idea of a temporary import surcharge -- backed by some American business interests -- as a way of coping with the trade deficit.
"Quotas, new tariffs, or import surcharges all act directly to raise prices, and the problem would not be temporary if the effect would be to refuel inflationary expectations -- just at a time when so much progress has been made in changing that psychology," he said.
Besides, Volcker warned, "so attractive a tax to the United States would certainly be attractive to others as well. . . . If the surcharge approach is, in effect, legitimized by the United States, wouldn't others find almost irresistible temptations to emulate our example . . . ?
"At a more fundamental level, we cannot logically take actions to reduce our trade deficit and at the same time welcome the associated capital inflows from abroad," he added.
Trading volume in the exchange markets was reported to be light, and some observers said that unless the intervention process continued -- which would be a costly process for the central banks -- the dollar could begin its upward climb again. "The fundamentals haven't changed," Hormats said.
In a speech last week to the Conference Board in New York, Hormats said that "one striking reason for the attractiveness, or pull, of investment in the United States is that investors do not appear to find opportunities in some other parts of the world sufficiently appealing."
A similar theme was outlined in a London speech yesterday by C. Fred Bergsten of the Institute for International Economics.
"I find it far easier at this point in time to explain the weakness of the other major currencies than the strength of the dollar," he said. "Whether justified or not, views of deep-seated structural weakness are pervasive both in Europe itself and around the world."