Britain's money managers agreed yesterday that the dollar's swift descent made no economic sense. They also agreed that they had no idea when the reversal they all expect will take place.
"Of course the dollar will turn around," one dealer said. "It's wildly oversold, but you win no prizes for being right in the long run if you roll up losses in the short."
The words and phrases used in the City, London's square-mile financial center, are "irrational" and "mob psychology." Butit takes a brave if not foolish dealer to stand up to the thundering herd. So speculators are performing their time-honored role, riding with the wave rather than damping it down.
Persons dealing in foreign exchange markets agree that President Carter can reserve the tide by unleashing his central bankers.
A short, sharp increase in interest rates, it is argued, would halt the plunge and restore confidence. The classic argument against this course is that more expensive, tighter money would produce a domestic slump in output and jobs.
The money men reply that this need not be so, provided that Washington acts to boost only short-term rates, perhaps 3 percent, and limits its action to a few weeks. This sort of medicine stopped the plunge in the pound two years ago.
The point is to drive up interest rates on 90-day treasury bills and other short-term credit instruments so high that holders of marks, francs, yen and the rest could not resist purchasing them. They would then have to convert their currencies into dollars and thus increase the demand.
British money men insist that it is West Germans and Swiss who have profited by speculating against the dollar. Managers here, say no bank is holding an "open" position at the end of the day, promising to sell at some future date, dollars it does not now own.
American banks here also insist they are "squared" each night, betting neither on a rise nor a fall an matching dollars assets with liabilities.
But such claims are always made, and only the central Bank of England - which is not saying - knows if they are true.
Large corporations, with daily cash inflows in the tens of millions inevitably are playing a role. Each night, money managers at Exxon or IBM, or Rhone-Poulence must decide in what currency they will hold the cash on the books.
Each day, they talk to one another on the telephone. If the prevailing word is: "The dollar is oversold but I can't afford to be caught with any," then all will dump dollars for "safer" currencies. Their apprehension tends to be self validating and the dollar falls some more.
Some measure of the corporations importance can be gleamed from the dollar's role in world trade. This is now running about $1 trillion a year, and three quarters of the contracts are denominated in dollars.
So buyers of goods delay their payments as long as possible, hoping it will cost them fewer marks, yen or pesos to meet their dollar debt. Sellers of goods well the dollar debt owed them as quickly as possible for fear that delay will cost them francs, lire or pound. Thus dollars are poured into the market and the foreign currencies held back.
This "leads and lags" effect alone can come to a month's worth of world trade, a depressant force on the dollar of $60 billion. The sum in turn dwafs the dollar's plunge. Another "fundamental" is the U.S. inflation rate. High as it is, it is still lower than that in many countries whose currencies are rising steeply against the dollar.
The money markets have already made it clear that they were unimpressed by President Carter's guidelines plan to curb inflation. The administration's own publicly expressed skepticism did not help increase confidence here.
But all hands agree that the president's plan is for the longer run at best. The falling dollar, it is now agreed, is the victim of short-run fears. That is why the money men insist the short-run measures like a brisk leap in short-term interest rates are the best medicine.
Meanwhile, the fear is that fear will continue to feed on itself forcing the dollar down further.