Last week, the central banks in many European countries "intervened" in foreign exchange markets in an effort to counteract the rising value of the U.S. dollar relative to their own currencies. And in this country, the Federal Reserve probably joined in, although only in a minor way, analysts said.
What were they trying to accomplish and how well did they succeed?
Foreign exchange markets in many ways are like markets in which other commodities are sold. Intervening in such a market can take a variety of forms, including the direct sale or purchase by the central banks of any traded currency.
No one knows the volume of currency transactions around the world that involve the U.S. dollar, but on most days it probably falls somewhere between $50 billion and $75 billion. Thus, the market is clearly too big for any central bank or all the central banks together to dictate for long any particular value of one currency in terms of another.
Nor is that the purpose of any intervention. About all an intervention can accomplish is to calm a disorderly market or perhaps to remind currency traders that markets are not intended to produce only sure things.
Prior to last week's interventions, traders had begun to think the dollar was on a one-way track headed up, according to Scott E. Pardee of Discount Corp. of New York. The traders were coming to work in the morning, buying dollars, selling their position for a profit later in the day and heading home for a good night's sleep with no worries about what might happen overnight.
Pardee, formerly a senior vice president of the New York Federal Reserve Bank and head of the group responsible for U.S. interventions in currency markets, said this sort of "one-way" market was given a further major push on the evening of Feb. 21. In a televised press conference that night, President Reagan gave the strong dollar his full endorsement, whatever it might be doing to hurt the U.S. trade balance.
"I can remember when our dollar was devalued, and there weren't very many people happy about that," Reagan declared. The source of the problem is that other nations have "rigidities" in their economies that are keeping them from growing as fast as the United States, he continued.
"What we really need is their recovery to bring their money up in value compared to ours," the president said. "I think if we start toying around with trying to reduce the value of the dollar without curing this other side of the issue, we put ourselves back into the inflation spiral, and that we don't want."
The dollar, which was already up 5.7 percent compared with the German deutsche mark since the first of the year, jumped another 3.3 percent over the next few days before the European central banks intervened last Wednesday.
"One way to establish two-way trading is to hammer the market," says Pardee, and that's what the central banks did "with very little assistance by U.S. authorities." Collectively, the banks sold about $1.5 billion worth of dollars in a coordinated way that made the intervention appear larger than it was.
Within a matter of minutes, the dollar plunged from 3.47 to below 3.30 DM, about a 5 percent decline. The spread between the traders' "buy" and "sell" prices for a currency were so wide for a while that, effectively, trading stopped.
But the intervention changed none of the fundamental reasons for the dollar's strength. U.S. saving still won't cover current U.S. investment and the federal budget deficit and foreigners are showing no diminished willingness to cover that yawning gap by investing in the United States. Nor did it do anything to change President Reagan's view of the appropriateness of the dollar's value.
"You can't win with intervention, especially with what the president had said the week before" -- but then that was not its purpose, explains Pardee. "You are not trying to influence markets through the volume of intervention but by influencing their psychology. There's a stampede and you're trying to turn the head cow." And on those grounds, he says, "I think they have done a marvelous job."
The dollar has resumed its upward movement and closed on Friday at about 3.35 DM. Trading and traders were much more cautious and the foreign central banks were trying to keep them that way. Calls were placed to traders asking about currency prices in such a manner as to imply an intervention might be coming. In fact, some small further interventions did occur.
The day before last week's big action, Federal Reserve Chairman Paul A. Volcker said that under some circumstances "forceful" interventions could be useful, but that a sharply declining dollar would create problems of its own, such as adding to inflation.
With the head of the U.S. central bank making such ambiguous statements about the dollar, with President Reagan quite happy with its value, and with the Treasury Department showing no more sign of wanting to intervene under Secretary James A. Baker III than it did under former Secretary Donald T. Regan, any future interventions by the U.S. likely will be very muted, says Pardee.