PRESSURE GROWS FOR U.S. ACTION TO AID DOLLAR
Pressure is growing in the financial
markets for the U.S. to take overt action to stabilize the
dollar even though doubts linger that it has fallen far enough
to help redress world trade imbalances, economists and dealers
said.
    Some experts believe that a half-point increase in the U.S.
discount rate, preferably in conjunction with rate cuts in
Tokyo and Bonn, would be enough to discourage sellers.
    But many fear that more drastic action, such as a U.S.
issue of yen-denominated Treasury bonds, may be needed.
    Despite official warnings about the dangers of a further
dollar decline and concerted central bank intervention, the
dollar extended its recent sharp depreciation, touching a
40-year low of 137.25 yen in Tokyo earlier today after closing
here on Friday at 139.30/40.
    The impact on other financial markets was devastating.
    In Tokyo, the stock market suffered its largest single day
decline; in London, gold bullion prices rose to four-year highs
and in the U.S., long Treasury bond yields surged above 8.80
pct and the Dow Jones Industrial Average fell more than 40
points in hectic early trading.
    "The problem now is linkage. This is not just a currency
problem. It is affecting all the markets," said one senior
trader at a major U.S. bank.
    Up until September of last year, international efforts to
redress world trade imbalances appeared to working like a
dream; the dollar was falling in an orderly manner, world
interest rates were tumbling and inflation was kept in check.
    In recent months, however, this strategy has begun to show
signs of severe stress, with the U.S. imposition of punitive
tariffs on Japan threatening to unravel this spirit of
cooperating and condemn the world to a damaging trade war.
    "The markets fear that we have built up a momentum that is
really difficult to stop. A U.S. rate hike has become an
inevitability," one currency dealer said.
    "At this point, nothing short of a Fed discount rate
increase, ideally combined with further discount rate cuts by
Japan and Germany, would seem capable of stabilizing the
dollar," said David Jones of Aubrey G. Lanston and Co Inc.
    Allen Sinai of Shearson Lehman Brothers Inc predicted a 1/4
to 1/2 point U.S. rate increase before May 19 and a rise in
U.S. bank prime lending rates to eight pct from 7-3/4 pct in
the near future.
    But many economists feared that any moderate U.S. rate
increases, which appear unlikely to be matched by rate cuts
overseas, would be too little, too late.
    "They should have done this 10 days ago. It would have done
the trick then," said one currency analyst.
    "If they do it now, it would be seen as a defensive measure
not an offensive one. It would show policy weakness not
strength," added one trader.
    In addition, economists fear that a discount rate rise
might place additional strain on a sluggish U.S. economy and
tempt embattled debtor nations to retaliate.
    A U.S. discount rate increase would also fuel the
protectionist fires in Washington, where the House is expected
to pass a protectionist trade bill, whatever compromises
President Reagan and Prime Minister Nakasone can come up with
during their summit later in the week.
    "Politically, they can't really do it this week," said one
currency analyst, pointing out that if it failed to stabilize
the dollar, it would only weaken the U.S. negotiating stance.
    Even if the U.S. retains the upper hand, economists and
traders do not hold out high hopes for any major new
initiatives from this week's talks.
    At best, the experts see some sort of accord whereby Japan
will agree to stimulate growth and open its domestic markets to
outsiders while the U.S. promises to lift its tariffs and
support the Group of Seven dollar stabilization agreement.
    But many fear that this may not be enough to assuage the
market's speculative selling fervor, which has now raised fears
of weak overseas interest at next week's quarterly U.S.
Treasury refunding program.
    Japanese and European investors have traditionally played
an active role in these auctions, which are expected to total
28 to 29 billion dlrs.
    Consequently, thoughts are turning to the possibility that
President Reagan may try to remove foreign investors' worries
about currency risk by financing part of the U.S. budget
deficit in yen or mark bonds, rather than dollars.
    While similar action by former President Carter helped to
stabilize the dollar in 1978, the White House is clearly
reluctant to take such a step, economists said.
    This hesitance was amply shown last Friday when U.S.
Treasury Secretary James Baker said, "there might well be some
who would view (yen-denominated bonds) as a lack of confidence
by the U.S. in its own currency."
    Baker added, "therefore we don't think it's an appropriate
thing to do."
    A foreign exchange analyst at a major Japanese bank here
shared Baker's doubts. "Dollar defending measures are very
unlikely. They will confirm the dollar's weak undertone and
lead to further speculative dollar selling," he said.
    Thus, it may be less destabilizing for the authorities to
stop trying to fight the market's bearish sentiment.
    In a recent lengthy report, economists at Morgan Guaranty
Trust Co concluded, "the dollar should be left free to trade at
whatever level market forces produce."
 Reuter
