BAKER/STOLTENBERG MEETING SOOTHES MARKETS
News of a meeting between U.S. Treasury
Secretary James Baker and West German Finance Minister Gerhard
Stoltenberg on Monday soothed currency markets, allowing the
dollar to recoup much of the day's losses, dealers said.
    News of the meeting, which took place in Frankfurt in great
secrecy, came after the dollar fell sharply on criticism by
Baker of West German monetary policy, which had provoked fears
that the Louvre pact on currency stability was in jeopardy.
    The dollar reacted immediately to the news, rising over two
pfennigs in after hours New York trading, dealers there said.
    The announcement of the meeting, also attended by
Bundesbank President Karl Otto Poehl, was made simultaneously
in Bonn and Washington, timed for after the closure of New York
markets.
    Baker, Stoltenberg and Poehl agreed to pursue the policies
accepted under the February Louvre accord, a finance ministry
spokesman in Bonn said.
    The dollar rose to 1.7970/90 marks from New York's close of
1.7730/40. It had closed there on Friday at 1.7975/85 marks.
    The dollar had tumbled nearly three pfennigs as the market
reacted to Baker's criticism of rising West German interest
rates, and stock markets crashed worldwide. Baker had said that
West Germany was apparently breaching the Louvre accord.
    Under the accord, leading industrial democracies pledged to
coordinate economic policies to foster currency stability, with
the surplus countries, West Germany and Japan, stimulating
their economies and the U.S. promising to cut its budget
deficit.
    West German government sources said rising West German
money market rates could not be seen as a breach of the Louvre
pact. They were rather a direct reaction to higher interest
rates in the United States. U.S. Bond yields have been rising
since May on inflationary fears and in early September the Fed
raised the discount rate to 6.00 pct from 5.50.
    German yields have also risen over this period, but less
markedly, and since late September the Bundesbank has nudged up
short-term rates by changing the terms on its security
repurchase pacts, its principal instrument for steering the
money market.
    The allocation rate on the last facility was 3.85 pct,
compared with 3.60 pct. This was partly due to West Germany's
inability to uncouple itself from U.S. interest rate trends,
but also reflected concern among monetary conservatives in the
Bundesbank central bank council about excessive monetary
growth, which raised fears of domestically produced inflation,
bank economists said.
    This monetary tightening reflected a switch from the
pragmatic line pursued by Bundesbank President Karl Otto Poehl
since early this year to stabilise the mark externally, to the
more cautious approach of Vice President Helmut Schlesinger.
    In an apparent gesture to Baker, coinciding with his visit,
the Bundesbank repeatedly added money market liquidity this
morning. Dealers said this was clearly a move to appease U.S.
anger over the most recent West German interest rate rises.
    "They (the Bundesbank) just don't want to come too much
under American fire," said Chris Zwermann, currency adviser at
Swiss Bank Corp here.
    "It seems to me that this is the Bundesbank beating quite a
significant retreat from its position," added Giles Keating,
economist at Credit Suisse First Boston Ltd in London.
    The significance that retreat will emerge from the terms of
the Bundesbank's next tender for a securities repurchase pact
on Tuesday, and its result on Wednesday, money market
economists said.
    Today's injection of liquidity shows that the Bundesbank
does not want a further strong rise in the tender allocation
rate, which is likely to turn out at between 3.80 and 3.90 pct,
little changed from the 3.85 pct on the last facility.
    The Bundesbank and Finance Ministry had given no indication
that the meeting would take place, although the Finance
Ministry spokesman said it had been arranged last week.
    Earlier on Monday the Finance Ministry spokesman, asked to
comment on the apparent U.S.-German clash over the Louvre
accord, went no further than quoting Stoltenberg as saying he
assumed monetary cooperation would continue.
    The spokesman said he believed Baker had already left West
Germany for Sweden on Monday. This week he is also due to visit
Denmark and Belgium.
 Reuter
