The chief financial officers of the five leading industrial nations agreed today to take steps to lower the value of the dollar and warned against a rising tide of protectionism that could lead to a global recession.
The officials left little doubt, in an extraordinary press conference after meetings which are rarely discussed in public, that they plan stronger, coordinated intervention in exchange markets to reduce the overvalued level of the U.S. dollar.
The special conference of the finance ministers and central bankers of the United States, Japan, France, West Germany, and Britain -- the so-called Group of Five -- was called by Treasury Secretary James A. Baker III. They issued a lengthy communique warning that a rising tide of protectionism threatens "destructive retaliation," which could cause a worldwide recession. They pledged joint action to fight the trend.
Baker said that the five countries "are making progress" toward a greater "convergence" of economic policies and achieving a better balance in their growth rates. He said that intervention in the foreign exchange markets "remains a policy choice," but in keeping with Treasury tradition, would not offer any comments on specific plans.
Asked what the public should conclude from today's meeting, he said he hoped they would understand that the G-5 economies are coming closer together. He said "such convergence had not yet been reflected fully in currency markets, and that there is a reasonable expectation that these countries are considering measures that will lead to a strengthening of the non-dollar currencies" -- another way of saying that the dollar would decline.
A principal theme of the communique is that despite the recent decline of the dollar from its February peak, exchange rates "should better reflect fundamental economic conditions than has been the case" and that the Japanese yen and other major currencies deserve to be higher.
Officials of the five nations "believe . . . some further orderly appreciation of the main non-dollar currencies against the dollar is desirable. They stand ready to cooperate more closely to encourage this when to do so would be helpful," the communique said.
Referring to this language, French Finance Minister Pierre Beregovoy, who has been a strong advocate of monetary reform measures leading to more stable exchange rates, lauded Baker's intiative in calling the session and told the press conference, "We have never said this [on exchange rates] in such specific terms."
Although the press conference was brief so several ministers could catch planes for trips home, each spoke warmly of the commitment to coordinate efforts for global growth. It was apparent in their remarks that they welcomed a new American willingness to concede that the excessive strength of the dollar had a great bearing on the trade and balance-of-payment problems, and to be taking a new initiative to cope with the dollar problem.
As British Chancellor of the Exchequer Nigel Lawson put it, "we are as close together as the five countries have ever been." And Japanese Finance Minister Noboru Takeshita and German Finance Minister Gerhard Stoltenberg separately told the press briefing that their two countries would pursue policies leading to expansion of their home economies.
The United States was represented by Baker and Federal Reserve Board Chairman Paul A. Volcker, who said at the conclusion of the press conference that "exchange rates must rest on the fundamentals and intervention may be helpful at times."
While the ministers' comments on intervention were deliberately low-key ("intervention" does not appear in the communique), there was no doubt of the intentions of the G-5 session. Treasury officials, speaking on background, said "there is a major change taking place in U.S. intervention policy. There may be no change in the way the policy is stated , but it just may be that this is an appropriate time" for action.
When governments intervene to affect the value of currencies, the central bank buys and sells its own money. It sells -- as in the case of a dollar considered overvalued -- and would buy when trying to raise the value of the currency.
Financial market observers reacted cautiously to the G-5 statement and press conference, preferring to see how the policy is carried out. But Jack Albertine of the American Business Conference, a manufacturers' lobby, said in a telephone interview that "we regard this as a very positive development on the trade front. This is the time for intervention."
Goldman Sachs vice president Robert Hormats said: "They wouldn't have gone to the trouble of getting this meeting together unless they intended to have greater intervention. I think it will be very useful to the president, who has had to respond to the charge that we don't have an exchange-rate policy. I'm convinced we can't have a trade policy without a dollar policy."
Reagan administration officials have been under growing pressure from Republican and Democratic politicians, and from the business community, to take steps to deal with what is generally considered a dollar overvalued by 30 percent, as a basic means of confronting the huge American trade deficit that is now running at a rate of about $150 billion a year.
Traditionally more reluctant to interfere with free-market developments than some of its major trading partners, the Reagan administration has been willing to intervene on only a few occasions. Most economists agree that intervention, standing alone, cannot buck the tide of huge capital movements, running into the hundreds of billions of dollars.
But administration officials have become persuaded that if there ever is a time when intervention might help, it is now, because the pace of economic activity in Europe and Japan -- which is rising -- is closer to the levels in the United States, which have softened from the extraordinary 6.8 percent real growth year of 1984.
Also congressional agitation to "do something" about the growing trade deficit has pressured the administration to do something about the difficulties the overvalued dollar is causing American manufacturers.
Today's special meeting was called by Baker in a surprise move to emphasize the United States' new willingness to work with the others to bring the dollar into a more reasonable relationship, especially with the Japanese yen and European currencies.
Other participants were Japanese Central Bank Governor Satoshi Sumita; West German Minister of Finance Gerhard Stoltenberg and Central Bank president Karl Otto Poehl; French Central Bank Governor Michale Camdessus; and Bank of England Governor Robin Leigh-Pemberton.
Since hitting a peak in February, the dollar has declined about 11 percent against other currencies on a trade-weighted basis. A Treasury official told reporters today that the ministers and bankers were in agreement that this decline is too small.
The joint communique contained an appendix, listing the "policy intentions" of each country, in form similar to the Bonn summit declaration, all of which affirmed commitment to mutual surveillance of each other's policies and providing access to their markets for LDC exports.