The dollar tumbled to new lows around the world yesterday after Treasury Secretary James A. Baker III signaled a major shift in U.S. policy from protecting the value of the dollar to avoiding a recession in this country by holding down interest rates.
The dollar took a second hit later in the day when White House spokesman Marlin Fitzwater confirmed that Baker's remarks in a Wall Street Journal interview reflected the position of the Reagan administration.
"The dollar has been way down all day on the remarks," said Gopalan Nair, chief currency trader for the New York brokerage firm of Drexel Burnham Lambert Inc. Baker's statement had such a strong impact on the market that it overwhelmed the expected positive effects of reports that West Germany had cut some of its interest rates, Nair added.
The dollar fell 1.2 percent against the Japanese yen, 1.6 percent against the West German mark and 2.1 percent against the English pound in hectic New York trading. The plunge continued in Tokyo trading early today.
As traders interpreted Baker's remarks to mean that the United States will no longer support the dollar, it crashed through what were considered key post-World War II lows for the mark and the yen. The dollar closed in New York at 1.6767 marks, down from 1.7045 marks Wednesday, and at 135.10 yen, down from 136.70 Wednesday. In trading early today in Tokyo, the dollar continued falling, dropping to 134.40.
Said Stephen Leach, a currency analyst at Chemical New York Capital Markets Group, "It's like the dollar is in a free fall and the Reagan administration is not encouraging stability."
Earlier yesterday, the dollar fell on Tokyo exchanges to 135.95 yen -- its lowest level since the late 1940s and a drop of 1.30 yen since Wednesday -- despite massive intervention by the Bank of Japan, which threw at least $1 billion into the market in a vain effort to support the dollar. The dollar recovered a bit in London trading later in the day, closing at 136.05 yen, before sinking further on the New York markets.
In Tokyo, the stock market tumbled 430.97 points on word of the Baker comments as many investors sold shares out of fear that the falling dollar, which means a rising yen, would hurt profits of companies in Japanese automobile and electronics industries that depend on overseas sales.
A low dollar cuts the price of U.S. products at home and abroad, making them more competitive, while foreign-made products become more expensive in the United States and in other markets.
On Capitol Hill, meanwhile, the acting director of the Congressional Budget Office, Edward M. Gramlich, told the Joint Economic Committee that the dollar would have to fall as much as 30 percent more by the end of next year to turn around a stubburn U.S. trade deficit. That would bring the dollar close to 100 yen.
"There's no way out that doesn't involve a further depreciation of the dollar," Gramlich said.
His view was backed by testimony of the chief economist of a leading Wall Street firm, Stephen S. Roach of Morgan Stanley & Co. Inc., who also endorsed a sharp fall in the value of the dollar to curb the United States' "seemingly insatiable appetite for goods made abroad."
Gramlich, reporting on computer analyses of various methods of lowering the trade deficit, said that neither a recession in the United States nor a speedup in the economic growth of major trading partners, such as West Germany or Japan, would do the job. But lowering the value of the dollar had "the most powerful" effect on the trade deficit, which has hit record highs for the past five years and appears headed even higher this year despite a 40 percent fall in the dollar over the past 2 1/2 years.
Combined with an economic slowdown in the United States and faster growth abroad, Gramlich said a sharp lowering of the dollar would turn the trade deficit into a surplus by 1990.
Roach said U.S. overseas sales have been "most impressive" over the past year, increasing by 16.2 percent, but imports -- especially in capital goods and oil products -- have also expanded.
Washington Post correspondents Fred Hiatt and Margaret Shapiro contributed to this report.