Notwithstanding the hoopla generated by an emergency meeting of the financial leaders of the Big Five countries here over the weekend pledging to devalue the dollar, the markets will take an understandable "show-me" attitude.
Despite yesterday's predictable "nervous" reaction, which dropped the dollar rate, the markets will need evidence over the longer term that the promise of intervention is more than a political ploy to avert defeat on trade legislation.
Almost everyone, including the president's own men, agrees that huge shifts in exchange rates in the past two years, creating a strong dollar and a relatively weak Japanese yen and German mark, have been the main trigger for the big American trade deficits.
The administration resisted action to bring the dollar off its perch. But it now turns out that because of seemingly insurmountable protectionist pressure in Congress, the administration in the last few weeks had sent Assistant Treasury Secretary David Mulford on a series of clandestine missions to Tokyo, London, Paris and Frankfurt to signal a willingness to change its long-held view that market intervention doesn't work.
As recently as mid-June, the Big Five financial leaders had signed a formal statement after a Tokyo meeting of the 10 leading industrial nations saying intervention can't "be relied upon to attain lasting stability of exchange rates." This dovetails with President Reagan's well-known commitment to a free-markets, hands-off policy.
But reflecting the growing demand from members of the president's own party -- and especially from influential businessmen -- to "do something" about the overvalued dollar, which is costing American manufacturers a major chunk of their sales and contributing to an oppressive $150 billion trade deficit, Mulford conveyed the administration's willingness to shift positions.
The quid pro quo that Mulford, on behalf of Treasury Secretary James A. Baker III sought from the others (especially Japan and West Germany) was a willingness to step up the pace of their domestic economies. This would help ease the U.S. trade deficit by encouraging American exports, and would give more credibility to the idea not only that the yen and the D-mark are too cheap but that intervention might have more of an effect than all had publicly said in June.
The result was the weekend show here at the Plaza Hotel. Baker, joined by Federal Reserve Board Chairman Paul A. Volcker and their counterparts from the other countries, stepped before TV cameras to say that the dollar should decline against other currencies and that "they stand ready to cooperate more closely to encourage this when to do so would be helpful."
Whether the five countries will actually commit big sums of money to push the dollar down -- and whether, then, it will stay down -- is a major unanswered question.
And whether Japan and West Germany will really pump up their economies against resistance of conservative establishments in both countries, which worry more about generating inflation than anything else, remains to be seen.
Financial market observers think that Baker and Mulford didn't get the commitment they hoped for. There are some indications that the language in the communiqu,e was watered down a bit. A separate appendix to the communiqu,e, listing each government's policies, is largely a restatement of what already is in place.
The German government, for example, noted that it "is already embarked on a course of steady economic recovery," and would continue to do what it is doing.
"It appears like a minimum agreement, and in that sense it is disappointing," said Salomon Bros. economist Henry Kaufman. "This just restates objectives that were well known."
On the other hand, the administration's willingness to try to pull the dollar off its high perch is a significant change.
Clearly, the Reagan administration once again is adjusting its ideology to harsh domestic political realities, just as it did on the question of economic sanctions against South Africa. Reagan's own trade ambassador, Clayton Yeutter, attributes "more than half" of the trade deficit to an overvalued dollar. Economists such as C. Fred Bergsten put the figure between two- thirds and three-quarters.
But the administration position had been to tsk-tsk the situation and do nothing about it. Officals don't want to admit that their own macroeconomic policies, leading to a huge budget deficit, are the major cause for the distorted dollar rate.
Now, however, the administration has been forced to join others who have counseled for some time that an active effort needs to be made to bring the dollar down. Whether the action was belated or not, Reagan and Baker should get credit for facing up to the real world -- if they follow through.
It won't take the markets long to test the Big Five's willingness to throw billions into the interventionist pot. Only then will we know whether the meeting here had substance or was more of a public-relations gesture to ward off the worst of the congressional protectionism.