DOLLAR DROP SEEN AS TEST OF PARIS AGREEMENT
The sharp drop in the value of the
dollar against the yen and the mark is the first serious test
of last month's Group of Five (G-5) plus Canada agreement to
stabilise currencies, dealers and bank economists said.
    "The dollar will be pushed down until there is coordinated
central bank intervention," one dealer for a German bank said,
echoing widepread sentiment in the market.
    But opinion was divided on whether the united front forged
in Paris still exists. Some dealers said there were growing
signs the United States wanted the dollar to fall further.
    Despite repeated Bank of Japan intervention, the dollar
plunged to a post-war low in Tokyo today. It was quoted as low
as 148.40 yen in the Far East and dealers here said they
expected the U.S. Currency to decline further.
    "The dollar is now firmly within a broad 140 to 150 yen
range," Chase Bank AG's senior dealer Eckhart Hager said.
    Others said there were technical reasons for the sharp
dollar drop. "Window-dressing" operations by some Japanese
companies who were selling dollars and buying yen before the
end of the Japanese fiscal year on March 31 were undermining
the U.S. Currency.
    Dealers said main reason for the sell-off was not
technical. U.S. Treasury Secretary James Baker's comment the
Paris accord did not have fixed dollar targets was seen as a
renewed attempt by the U.S. Administration to talk the dollar
down.
    "Suddenly, support levels which had existed for fear of
central bank intervention disappeared," one dealer said.
    The Bank of Japan was believed to have bought some 1.5
billion dlrs, and this with comments by Japanese officials
indicated Tokyo was unhappy about the plunge, dealers said.
Bank of Japan governor Satoshi Sumita threatened central bank
intervention if necessary.
    Japanese Finance Minister Kiichi Miyazawa said today the
time had come for the six nations who agreed in Paris last
month to stabilise currencies - Japan, Britain, Canada, France,
the U.S. And West Germany - to take action in line with the
pact.
    But the Bundesbank and other European central banks were
not detected in the open market during the European morning.
Opinion here was divided on when the Bundesbank would act.
    While some said the West German central bank would support
the dollar once it fell below 1.80 marks, others said the
Bundesbank would only intervene after a fall below 1.75 marks
or if the decline accelerated.
    The Bundesbank last intervened on January 27, when the
dollar threatened to fall below 1.81 marks.
    "The Japanese seem to be on their own at the moment," one
dealer said. Others said cooperation between central banks and
governments was easier said than done.
    Some said Baker's remarks and U.S. Trade Representative
Clayton Yeutter's warning that the U.S. And Japan were on the
verge of a serious trade conflict showed there was a rift.
    "It's hard to tell whether the G-6 agreement still stands," a
dealer said. Another added, "If the Americans do not get what
they want, they will push the dollar down, regardless of G-6."
    Citibank AG also cast doubt on the chances of success for
the Paris agreement in its latest investment letter.
    "It is hard to see that Japan and Germany are willing or
able to loosen fiscal policy sufficiently to offset the
necessary U.S. Fiscal contraction," Citibank said.
    It added, "Markets should therefore be aware that 1.80 marks
is not the lower limit for the dollar -- a rate of 1.70 marks
or even less is expected this year."
    And London Broker Hoare Govett said in its March 1987
economic report, "We are looking for a further, more gradual,
fall, possibly to 1.60 marks by the end of the year."
    But opinion about whether the Paris accord was still in
force was not universal. Some dealers said not too much should
be read into Baker's and Yeutter's comments.
    "There is no reason to believe the Paris pact has broken
down," a senior dealer said.
 REUTER
