The American dollar yesterday recovered most of the ground that it had lost against major foreign currencies as a result of a seemingly pessimistic warning by Federal Reserve Board Chairman Paul A. Volcker.
In congressional testimony on Wednesday, Volcker had said there could be "a very sharp decline" in the international value of the dollar, because market psychology, which had been boosting the dollar, could "change rapidly."
Although spokesmen for the Fed said afterwards that the chairman had not intended to say anything negative or new about the dollar -- and had not predicted a dollar decline -- Volcker's remarks touched off a selling wave, amid considerable uncertainty in nervous markets, that lasted through early trading yesterday morning.
Referring to his unintended impact on exchange rates the day before, Volcker yesterday joked to a Washington audience that any effect of the comments he was about to make should apply "only to the exchange rate between the ruble and the zloty."
Last week, after Volcker suggested there was room for more "forceful" intervention to stabilize exchange rates, the European central banks followed up by selling dollars in a coordinated way, sharply depressing the market. Their intervention was an estimated $4.5 billion.
It quickly developed, however, that the United States had intervened in only a token way. Administration spokesmen reiterated there was no real change in U.S. policy, which is to discourage intervention except in the case of "disorderly" markets.
The net result after the European banks' expensive operation was only a small change in the dollar's value, and traders freely predicted that, unless the intervention was maintained for a longer period, the strength of the U.S. economy would continue to pull the dollar higher.
The market yesterday was on the alert for an intervention move like last week's, anticipating that the central banks led by West German Bundesbank President Karl Otto Poehl might again try to exploit the uncertainty precipitated by Volcker's latest comment. When that didn't materialize, the dollar rebounded.
"The dollar still is well bid; fundamentals haven't changed," Carmine Rotondo of Manufacturers Hanover Trust told United Press International. "The only thing that's new is uncertainty over central banks and that's keeping trading thin at the top levels."
Rotondo said before the dollar weakens, "there will have to be a better growth rate and lower unemployment in West Germany and other European countries."
European closing rates with late New York prices and comparable Wednesday rates in parentheses: Frankfurt, 3.4085 marks, down from 3.4250 (3.42 vs. 3.382); Zurich, 2.9015 Swiss francs, down from 2.9230 (2.91 vs. 2.884); Paris, 10.3937 francs, down from 10.4725 (10.406 vs. 10.194); Milan, 2,123.60 lire, down from 2,136.50 (2,118.64 vs. 2,100.84).
In London, the pound fell to $1.0645 from $1.0730. The Canadian dollar rose to 71.60 U.S. cents from 71.49. Overnight in Tokyo, the dollar rose to 261.35 yen from 261.25. In New York, it was 261.57 yen, compared with 260.55 on Wednesday.