DOLLAR VALUE APPROPRIATE, BUNDESBANK OFFICIAL SAYS
The dollar is near appropriate levels
against European currencies and the yen, and a further fall
could damage confidence in the currency while endangering world
economic growth, a top Bundesbank official said.
    Board member Leonhard Gleske also told a Forex Association
conference current exchange rates of major currencies "can be
viewed as equilibrium levels in a medium-term perspective."
    He said the recent Paris agreement on currency
stabilisation and policy coordination between the Group of Five
and Canada may herald "an era of greater exchange rate
stability."
    The Paris agreement was not, however, an attempt to set up
permanent target zones for exchange rates, Gleske stressed,
adding such targets would be extremely difficult to agree and
enforce on an international level.
    "At present levels the dollar can no longer be considered
grossly overvalued in relation to the European currencies and
the yen," Gleske said.
    He said the dollar had fallen much less against currencies
of important trading nations such as Canada, Korea, Taiwan and
Hong Kong, and further falls there may still be necessary.
    But "a further dollar depreciation against major European
currencies and the yen may not be the best way to restore the
dollar to a fully competitive position, as measured by its
weighted external value," he said.
   In fact, a further marked decline in the dollar rate would
hold two major dangers, Gleske said.
    First, in countries with large balance of payments
surpluses such as Japan and West Germany, it threatened to
hamper economic growth and thus slow down the expansion of real
income and domestic expenditure necessary to wipe out
surpluses.
    Second, in the United States, it could damage investors'
confidence in the dollar and thus reduce their willingness to
finance huge fiscal and external payments deficits, Gleske
said.
    Gleske also was strongly sceptical that an international
system of binding target zones for currencies, fluctuating in
narrow bands against each other, can be established. Such
targets threatened to cause policy conflicts, "both within
countries and between them."
    For instance, the U.S. Reliance on foreign capital to fund
its deficits requires interest rates there be set at high
levels, but domestic considerations call for low ones.
    If target zones were established, this would put "pressure
on other countries to reduce their interest rates even more,
even though this may be in conflict with their own domestic
situation and priorities," he said.
    Gleske added, "targeting the exchange rate even within a
wide margin will meet with serious objections where there is a
clearly perceived potential for conflict between domestic and
external policy priorities."
    Commenting on the Paris currency accord, Gleske said its
chances of stabilising exchange rates rested heavily on current
interest rate differentials being maintained.
    These chances "seem to me to rest critically on the
expectation that the current configuration of interest rates,
and the monetary policies behind them, will assure smooth
financing of current account imbalances in the months ahead."
    Gleske said past experience of currency adjustments had
learned "that markets are inclined to be impatient and will thus
tend to overshoot." He said this "would seem to be unnecessary
and should be avoided if at all possible."
    Monetary policies can help achieve this, but only if
markets believe that pledged changes in fiscal policies will
lead to balanced international payments, he said.
 REUTER
