The dollar rose sharply in both European and New York trading yesterday and then fell abruptly after Vice President George Bush suggested that the United States still opposes intervention in foreign exchange markets.
Despite its afternoon drop, the dollar closed higher in New York and London. But it fell to another postwar low in Tokyo against the Japanese yen.
Bush's remarks seemed to contradict an earlier announcement by Treasury Secretary James A. Baker III in Tokyo of a new agreement to manage the international monetary system in an attempt to curb volatile fluctuations of the dollar and other currencies.
The agreement -- reached at the economic summit involving the United States, Japan, Britain, West Germany, France, Canada and Italy -- calls for frequent reviews of the economic performance of the individual nations. The seven nations then would take remedial action when it was determined that exchange rates were out of line. One of the major actions contemplated is intervention in foreign exchanges.
Governments intervene by buying and selling different currencies to affect their values by increasing or decreasing demand for them.
Bush suggested at a meeting with U.S. business leaders in Washington that it was not U.S. policy to intervene.
"The vice president was aware of the summit agreements, but his remarks on intervention were not intended to impart any new information," said Bush spokesman Marlin Fitzwater. "Any reactions by the markets were unwarranted."
Meanwhile, Salomon Brothers chief economist Henry Kaufman said yesterday that, "For the immediate future, there is some additional decline in interest rates ahead."
Lower U.S. interest rates could make dollar-denominated assets less attractive to investors and lead to a reduced demand for, and value of, the dollar.
Former Federal Reserve governor Lyle Gramley also suggested that interest rates soon may fall again. Gramley said at a news conference following a Mortgage Bankers Association conference that there is more than a 50-50 chance that the Fed will reduce the discount rate in the next few months.
In New York, the dollar rose sharply yesterday morning as the result of press reports from Tokyo on comments made by West German Finance Minister Gerhard Stoltenberg.
The dollar "went up dramatically on Stoltenberg's comments . . . that the dollar had fallen enough and that he had gotten the impression from the summit that the Americans agreed with that and they would not rule out intervening in the currency markets to prevent the dollar from falling further," said Jeffrey Brummette, assistant vice president for Irving Trust in New York.
At that point, the dollar had risen to about 2.2280 against the West German mark from 2.1890 on Monday, said Audrey McNiff, assistant vice president at Irving Trust.
Then Bush answered a question at a meeting of the Council of the Americas by saying, "It's not the philosophy of the U.S. to intervene in curreny markets," McNiff noted.
"We saw the dollar start crashing down to 2.1935 against the mark. It fell about 3.5 pfennigs. It tried to recover, but it just couldn't."