The Justice Department is investigating charges that major U.S. banks have deliberately encouraged fluctuations in the dollar in world money markets and profited illegally as a result.
A Justice spokesman confirmed yesterday that the department "is in the early stages of a civil investigation" into the possibility that some banks have structured their trading in the dollar abroad to force fluctuations that result in profits.
In the past 18 months, the dollar has fallen sharply on world currency markets and there has been accompanying speculation that some big banks have profited heavily from the decline.
The alleged bank activity under investigation, if proven, would be a violation of price-fixing statutes of the Sherman Antitrust Act. Legal sources say that the Justice Department would likely seek an injunction preventing any further violations, but would be hard-pressed to impose other penalties because of the complex nature of the transactions.
Congressional sources who have been contacted by Justice investigations say the probe is an outgrowth of a civil suit filed against Citibank by one of its foreign money traders, who charged that the bank dismissed him after he raised allegations within the bank of improper activities on the part of bank officials in Europe.
The employe, David Edwards, has alleged in court papers and magazine articles he has written that overseas money traders for Citibank and other banks have worked together to create money market conditions allowing for quick, short-term profits.
While most industry sources say it is virtually impossible for one bank to control money market conditions for any prolonged period, short-term fluctuations can be manipulated by a series of large transactions.
Edwards has contended that traders in Europe for major U.S. banks have orchestrated large-scale sales of the dollar over short periods, usually a matter of hours or days, causing the price of the dollar to drop.
The dollar drops in value because there are more sellers than buyers.
Edwards alleges that the money-trader - working with characteristic speed - purchases the dollar back at the lower price, thus showing a short-term profit.
Edwards has been contracted by several congressional committees concerning the allegations, and the Securities and Exchange Commission is investigating his charges.
Hill sources say Justice is looking into whether cooperation among moneytraders for the various banks constitues a form of insider trading that creates an unfair - and illegal - advantage.