Federal Reserve Board Chairman Paul A. Volcker, in an apparent disagreement with the Reagan administration, yesterday warned that the value of the dollar may have "fallen enough" in foreign exchange markets to raise not only a new threat of inflation but also a question of "confidence in our currency."
On Tuesday, Treasury Secretary James A. Baker III said that he would "not be displeased" if the dollar declined further in foreign exchange markets.
But a senior Reagan administration official, in a background interview, moved swiftly to downplay any conflict between Volcker's remarks to the House Banking Committee and Baker's comments to the Senate Budget Committee.
When asked by Rep. Charles Schumer (D-N.Y.) if the dollar, which has declined about 30 percent against other major currencies in the last year, had gone down enough or whether he hopes it falls more, Volcker said:
"Well, I don't know. I think it's fallen enough in the sense that it's fallen quite a lot, but I don't know where the dollar is going to be over time. But I certainly don't think it's anything we're interested in forcing." He made clear that the course of the dollar in the next few months would be an important factor in Fed decisions on the direction of the nation's overall monetary policy.
Baker's desire to see the dollar move down was underscored yesterday by U.S. Trade Representative Clayton Yeutter, who told another congressional committee that "the dollar hasn't declined enough to counter the United States' trade deficit in the next six months or a year." Yeutter last week had called for an additional 15 to 20 percent drop in the dollar exchange rate.
The dollar has been moving down sharply against the Japanese yen and major European currencies in the past year, a trend welcomed by Reagan administration and foreign officials, who attribute most of the $149 billion 1985 U.S. trade deficit to an overvalued dollar.
The slide in the past few weeks has been especially sharp against the Japanese currency. Japanese authorities have lowered interest rates in that country in hope that will stimulate a better economic growth in a presently sluggish economy.
In Tokyo yesterday, the dollar fell to its lowest level since Nov. 1, 1978, closing at 178.80 yen, down 2.95 yen from Tuesday's closing rate of 181.75. In late trading in New York, Volcker's warning reversed some of the additional decline against the yen and other currencies that had been underway since Baker's testimony on Tuesday. Traders apparently concluded that Volcker's reservations at least would slow the decline of the dollar.
In an interview, a senior Reagan administration official, who asked not to be named, said he welcomed Volcker's statement on the dollar, and he argued that there was no inconsistency between the Volcker and Baker statements, or between Volcker's position and Yeutter's.
"It's good to have all perspectives and, in a sense, all parties are right," the official said. Pointing to Volcker's suggestion that the dollar rate should not be "forced" down, he said that the central banker properly had suggested "that, for the dollar to go down more, we need a further change in the [economic] fundamentals."
Baker's position is no different, he said. A change in the "fundamentals," for example, would include a greater expansion of the Japanese and European economies -- something that Volcker also said would be desirable. And as for the Yeutter position, the official said it is understandable that Yeutter, worried about the trade deficit, might make an argument for a further decline "that may be less subtle."
"Everything that Volcker said makes sense," he concluded. "He's right to worry that, if we pushed the dollar down beyond what the fundamentals call for, it would have an adverse effect on interest rates. Both Baker and Yeutter ought not to want the dollar to come down through intervention or speculation against it."
In annual testimony on Federal Reserve policy and targets -- mandated by the Humphrey-Hawkins Act -- Volcker said that the dollar had been too high in 1984 and early 1985. He endorsed the effort launched by the Reagan administration, through a meeting of the Group of Five financial ministers last Sept. 22 to bring the dollar down. The five countries are the United States, Japan, West Germany, France and Britain.
But Volcker warned that the dollar devaluation could be a "two-edged sword," helping to make American goods more competitive, but creating the potential for more inflation as the price of foreign goods rises.
In addition, any loss of confidence that might stem from a sharp drop in the value of the dollar could dampen the willingness of foreigners to invest huge sums in dollars. That inflow of foreign money has been important in financing the U.S. budget deficit, Volcker said.
In response to questions, Volcker elaborated on his long-held view that, once a nation begins an effort to bring down the value of its currency, it's possible to lose control of the process. "It is very easy to overshoot on the downside," he said, noting that the United States had had "some experience" on that score.
He also suggested that U.S. companies that were at a disadvantage last year because of the overvalued dollar might now get as much, or more, help from stronger growth rates in Japan and Europe as from further declines in the dollar.