The assistant Treasury secretary for international affairs, David Mulford, told a House Foreign Affairs subcommittee on international economic policy yesterday that intervention has little purpose beyond tamping down disorderly foreign exchange markets and "certainly has not to date proved to be effective."
Mulford added that U.S. policy on intervention was not altered at a Jan. 17 meeting of the Group of Five finance ministers. Only a slight change was made, and that was a "nuance," Mulford said.
Meanwhile, Federal Reserve Governor Henry Wallich told the National Economists Club that policymakers have become skeptical about the value of intervention and cannot place a great deal of weight on that process because it does not change any fundamental trends.
Wallich said that the present situation is not sustainable in the long run, and that, if the dollar "defies the fundamentals" and remains high, the current account deficit of the United States -- which was $100 billion in 1984 -- will worsen and cause further damage to American exporters and those who compete with import industries.
Nonetheless, the U.S. dollar was strong in foreign exchange markets yesterday and again closed higher, although traders said that the rise may have been inhibited somewhat by the possibility that central banks -- notably the West German Bundesbank, which intervened heavily last week -- may decide once again to sell dollars.
Wallich also warned in his speech that it is premature to suggest that inflation has been defeated. He said that the current level of inflation is "unsatisfactory," terming his own assessment "gloomy," because he no longer sees assurance of low inflation and because the belief in the stability of exchange rates also has evaporated.
In his testimony, Mulford rejected the notion that the dollar is "overvalued," saying the price is set by supply and demand in a free market.
But one of Mulford's predecessors in the Treasury post, C. Fred Bergsten, told the same House subcommittee that the dollar is overvalued by about 40 percent, based on the "underlying competitive position of the United States in world trade."
Foreign exchange traders were looking over their shoulders yesterday for selling by the Bundesbank. When it didn't show up, the dollar climbed to 3.41575 West German marks in Europe from 3.37 Monday; and to 10.4345 French francs from 10.30. The British pound, meanwhile, continued to slip, to $1.0592 from $1.07 Monday. Gold was off 50 cents in London to $288 an ounce.