AFTER G-6, ROUND ONE GOES TO CENTRAL BANKS
Central banks have easily beaten back
the foreign exchange market's first test of the industrialized
nations' recent pact to stabilize currencies, analysts said.
    In active trading this week, the market pushed the dollar,
sterling, the Canadian dollar and Australian dollar higher. But
operators got their fingers burned as one by one the central
banks signalled their displeasure.
    "So far G-6 has been a roaring success,"said James O'Neill,
financial markets economist at Marine Midland Bank NA.
    "The central banks are sending strong signals that they
won't tolerate any kind of momentum building behind
currencies," added a senior corporate trader at one U.K. bank.
    On February 22, the finance ministers and central bank
governors of the U.S., Japan, West Germany, France and the U.K.
-- the Group of Five -- plus Canada, signed an accord under
which they agreed to cooperate closely to foster stability of
exchange rates around prevailing levels.
    The agreement was viewed by many in the market as an
attempt to put a floor under the dollar after its sizeable
two-year decline against major world currencies.
    And initially, traders indicated their respect for the
accord by refraining from pushing the dollar lower.
    But by Wednesday, the dollar climbed to more than 1.87
marks, about five pfennigs above its levels the Friday before
the G-6 accord.
    The move was aided by indications that the U.S. economy
picked up steam in February at the same time as the West German
economy was regressing.
    But dealers said the Federal Reserve Bank of New York gave
traders a sharp reminder that the G-6 pact had encompassed the
idea of limiting inordinate dollar gains as well as declines.
    Dealers differed as to whether the U.S. central bank
actually intervened to sell dollars above 1.87 marks, or simply
telephoned dealers to ask for quotes and enquire about trading
conditions.
    But the dollar quickly backed off. It hovered today around
1.85 marks. "The market was surprised that the Fed showed its
face so soon," said Marine Midland NA's O'Neill.
    Also on Wednesday, London dealers said the Bank of England
intervened in the open market to sell sterling as the U.K.
currency rose to 1.60 dlrs compared with 1.5355 dlrs before the
G-6 pact.
    Sterling, along with the other high-yield currencies like
the Australian dollar and Canadian dollar, was in favor after
traders surmised that the the chance of intervention pursuant
to the Paris currency accord left limited room for profit plays
on dollar/mark and dollar/yen.
    The pound also was boosted by suggestions of an improving
U.K. economy, anticipation of a popular British budget on March
17 and public opinion polls showing good chances for the
incumbent Conservative party in any general election.
    "There was a real run on sterling," said Anne Mills of
Shearson Lehman Brothers Inc.
    Sterling traded today around 1.5750 dlrs, down from 1.5870
dlrs last night. It slid to 2.917 marks from 2.950 yesterday
and from a peak of about 2.98 recently. "There's been some
heavy profit-taking on sterling/mark ahead of next Tuesday's
U.K. budget," said James McGroarty of Discount Corp.
    As speculators detected the presence of the U.S. and
British central banks, they acclerated their shift into
Canadian and Australian dollars. But here too they were
stymied. The Bank of Canada acted to slow its currency's rise.
    The Canadian dollar traded at 1.3218/23 per U.S. dollar
today, down from 1.3185/90 yesterday.
    And the Australian Reserve Bank, using the Fed as agent,
sold Australian dollars in the U.S. yesterday, dealers said.
    The Australian dollar fell to a low of 67.45/55 U.S. cents
today from a high of 69.02 Thursday.
    Analysts said the central banks' moves to stifle sudden
upward movement, leave the market uncertain about its next
step. Today, the focus shifted to the yen which has held to a
very tight range against the dollar for several months.
    The dollar fell to 152.35/40 yen from 153.35/40 last night.
Analysts said the yen also gained as traders unwound long
sterling/short mark positions established lately.
    "Because of the change in perceptions about the health of
the German economy, the funds from those unwinding operations
are ending up in yen," a dealer at one U.K. bank said.
    Recent West German data have shown falling industry orders,
lower industrial output and slowing employment gains.
    Moreover, the yen is benefitting as Japanese entities who
have invested heavily overseas, for example in Australian
financial instruments, repatriate their profits ahead of the
end of the Japanese fiscal year on March 31.
    Noting that the dollar/yen rate is in a sense the most
controversial one because of the large U.S. trade deficit with
Japan, analysts said the stage could be set for another test of
the dollar's downward scope against the Japanese currency.
    In its latest review of the foreign exchange market through
the end of January, the Federal Reserve revealed that it
intervened to protect the dollar against the yen on January 28.
On that day, the dollar fell as low as 150.40 yen.
    "Sure, the Fed bought dollars near the 150 yen level in
January. But the market has to bear in mind that time marches
on and the situation changes," said McGroarty of Discount.
 Reuter
