Too Little, Too Late for the Dollar

German-American agreement falls flat on the exchanges

What mountains labored to bring forth such a ridiculous molehill!" complained Bonn's respected daily Die Welt. "A piecemeal approach that cannot work," sniffed the foreign currency chief of France's largest private bank. Such was the curt reaction in money centers last week to a widely ballyhooed U.S.-West German agreement that will give Washington more ammunition, in the form of borrowed deutsche marks, to use in defending the battered dollar. But unfortunately, the greenback fell once again in all major currency markets.

The disappointment was all the greater because hopes had been built high. Jimmy Carter at his March 9 press conference personally announced that U.S. and West German officials were negotiating a package of dollar-support measures, leading money traders to think that something big was coming. The negotiations were conducted by transatlantic telephone calls, mostly between Treasury Under Secretary Anthony Solomon, a reserved, pipe-smoking, self-made millionaire, and Manfred Lahnstein, State Secretary of the West German Finance Ministry, who is one of Bonn's fastest rising whiz kids.

The two men concluded a deal that was revealed early last week. West Germany will lend the U.S. an additional $2 billion worth of deutsche marks that Washington can use to buy up surplus dollars on the exchange markets. That doubles the Treasury's line of credit at the West German central bank in Frankfurt. In addition, the U.S. may sell $740 million worth of IMF Special Drawing Rights ("paper gold") to the Germans for deutsche marks, and it proposes to borrow as much as $5 billion of foreign currencies from the IMF. That $5 billion credit already existed. Hence the net new money available to the U.S. under the agreement is $2.7 billion.

Had such a pact been concluded two months ago, it might well have steadied the dollar. But coming after dollars had been inundating currency markets, it was clearly too little, too late. Money traders were disappointed that the U.S. announced no plans to sell Treasury bonds to foreign central banks and take loans from private foreign banks to build its reserves of foreign currency, as had been rumored. Said one leading German banker of the $740 million to be raised by selling SDKs: "That much can be spent in two hours over the telephone." Moreover, Solomon again emphasized that the U.S. intends to buy up only as many dollars as might be necessary to prevent "disorderly markets," meaning that the U.S. will intervene only to prevent precipitate declines of the dollar. To exchange dealers, this means Washington is still prepared to let the dollar sink--gradually.

Sink it did last week, and not so gradually. Before the agreement, the dollar had risen to 2.08 DMs; by week's end it had dropped to 2.03. It also fell against the Swiss franc, the French franc, the Italian lira and the British pound.

In Tokyo, the dollar hit a new low of 231.40 Japanese yen. Alarmed by the trend, which makes Japanese exports more expensive, the Tokyo government forbade sale of short-term Japanese bonds to foreigners and cut the central bank interest rate to 3.5%, the lowest since 1946. Those measures failed to keep dollars from pouring into Japan, so the Bank of Japan bought up $500 million of greenbacks offered for sale. That did not prop the price, and at one point the dollar broke the 230-barrier on some exchanges.

In an effort to reduce Japan's burgeoning trade surplus, a 91-man Japanese trade delegation was scouring the U.S. last week looking for U.S. products to import. So far, the Japanese visitors have spent $1 billion on raw materials plus another billion on finished goods ranging from home furnishings to machine tools to fur coats. To help the U.S. sell more abroad, Delegation Chief Yoshizo Ikeda, the chief of Japan's huge Mitsui trading firm, offered Washington the use of a Japanese ship, which he and other successful exporters use as a floating trade fair.

Such actions are badly needed. The turbulent monetary markets and a rise of protectionism are already causing a serious decline in the volume of world trade. According to new figures released by GATT in Geneva, world trade grew only 4% in 1977 (v. 11% the year before), and the slowdown is continuing.

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