The agreement at the economic summit to a U.S. plan for closer economic policy coordination among major industrial nations should lead to smaller swings in exchange rates than those that have occurred in recent years.
A number of financial analysts yesterday suggested the agreement also could meet some short-term needs for many of the participants at the summit: the United States, Britain, Japan, West Germany, France, Canada and Italy.
With the agreement in hand, for instance, Japanese Prime Minister Yasuhiro Nakasone probably could expect more support from the United States in his country's recent effort to keep the value of the yen from continuing to rise sharply, hurting Japanese exports.
In exchange, at least implicitly, the Japanese likely agreed to seek to stimulate their domestic economy by lowering interest rates again, the analysts said. Both faster growth and lower interest rates should tend to weaken the yen, while the faster growth should lead to a reduction in the very large Japanese trade surplus.
The faster Japanese growth should mean an increase in the sale of U.S. exports there, which in turn would help reduce this country's large trade deficit. And the added U.S. export sales would provide stimulus for the U.S. economy.
If interest rates are cut again in Japan and West Germany, and there is an understanding that the governments involved do not want the value of the U.S. dollar to continue to decline sharply relative to the yen and the German mark, then the Federal Reserve probably would feel it has more leeway to reduce interest rates in this country, too. Federal Reserve officials, worried about the possible inflationary implications of a declining dollar, have been reluctant to push interest rates down, though they have allowed the rates they control directly to follow market-determined rates downward.
If financial market participants believe the dollar is not apt to fall significantly, it should encourage foreign investors to provide more capital to the United States to help finance the federal budget deficit and private investment. With more capital inflow, the Federal Reserve would have additional room to lower interest rates.
Despite an apparent emphasis on exchange rate stability by U.S. officials describing the summit agreement, there was no indication of any intention to try to control closely day-to-day variations in exchange rates, or to set relatively narrow bands within which exchange rates could vary -- as is the case today for the currencies that are part of the European Monetary System.
The American plan embodied the recognition that no amount of direct intervention by governments in exchange markets was likely to provide a successful defense of any particular currency value if a country's basic economic policies were at odds with that rate.
A number of financial analysts suggested yesterday that the most important part of the new scheme is a provision for regular assessment of the principle economic variables of each of the seven nations involved, with exchange rates being one variable on the list. Others include changes in the gross national product, inflation, unemployment, interest rates, money supply growth and budget deficits.
"This will put peer pressure on all the countries to get all the variables right," said Robert Hormats, vice president for international finance at Goldman Sachs & Co. "Everybody wants to stabilize currencies, but exchange rates are not independent variables."
The plan, if carried out, should lead to "improved management of the international economic system," Hormats declared.
Scott E. Pardee, an economist at Discount Corp. of New York who formerly was manager for foreign operations of the Federal Reserve's open market account, also praised the proposal. "It sounds like a very positive development. . . . It could lead to greater stability of exchange rates in a very broad sense," he said.
Pardee said that, under the plan, he would not expect central banks to intervene frequently in foreign exchange markets by buying or selling currencies. Instead, the meetings at which policies would be discussed would signal the market about government intentions, he said.
Pardee and Hormats stressed that intervention without policy coordination would not do much good.