The Japanese call it the ``currency game.'' An attempt to curtail the game has started. West Germany's central bank Thursday lowered its key interest rate to 3 percent from 3.5 percent. This weekend Japan is expected to lower interest rates.
Pressures for such action abroad grew stronger when Paul Volcker, chairman of the Federal Reserve, told reporters Wednesday that American allies have room in their economies for rate cuts. At the same time, a meeting between Treasury Secretary James A. Baker III and Kiichi Miyazawa, Japan's finance minister, ended with only a vaguely worded statement about a ``willingness to cooperate on exchange market issues.''
The meeting's results did not provide much assurance to the foreign exchange markets: The dollar dropped further in trading Thursday, after rising slightly before Germany's discount-rate cut.
The central bank also adopted measures to curb excess growth in the money supply, which could negate the rate cut's effect. The Germans may request another meeting of the Group of Five (G5), which includes Britain, France, Germany, the United States, and Japan.
``They still have some hope of keeping the spirit of the Plaza Accord alive,'' says David Morrison, an economist with Goldman Sachs in London. The 1985 accord resulted in forcing down the dollar's value on exchange markets.
It is also expected that the Japanese will drop their central bank's lending rate by half of a percent. This is part of the Baker-Miyazawa agreement ``to continue cooperative efforts to stimulate growth and to reduce external imbalances.''
It is not yet clear what Secretary Baker had to promise in return. It also is not clear if the US would back another G5 meeting. Mr. Miyazawa said there was no consensus for such a meeting. J. Paul Horne, an international economist with Smith Barney Harris Upham Inc. in Paris, believes, however, that pressures are building for such a gathering. ``The Europeans feel they have been left out,'' he explains.
At the same time, there is resentment among the US trading partners about what they view as ``talking down'' the dollar's value. While publicly denying they wanted the US dollar to fall, some US officials privately were telling reporters they wanted to see the dollar drop.
``It was a deliberate leak,'' says David Wyss, an economist at DRI Inc., in Lexington, Mass. ``But the question is, why was it leaked?'' Mr. Wyss guesses it could have been a ``trial balloon, and then the officials got scared when the dollar went down so much.''
This is certainly what brought Mr. Miyazawa to Washington on short notice. The Japanese have seen their currency appreciate almost 60 percent in the last year. They are running a $50 billion trade surplus with the US. They became concerned when the dollar dropped 6 percent in three weeks, which Baker and Miyazawa characterized as ``temporary instability.'' To buttress the yen, within the last three weeks the Bank of Japan has bought $10 billion in dollars, while last year it spent only $12 billion on currency stabilization.
It was unclear whether the US would actively intervene in the markets to stabilize the dollar. Miyazawa said it was unlikely the US would ``officially say if they will intervene in the exchange markets.'' Treasury officials have not said what they will do either.
Some analysts believe the plunging dollar has not harmed the US and its relationships with its allies over the long term. ``The Europeans are resigned to the American way when they are out of alternatives,'' says Mr. Horne. ``When the Americans are in a corner, they push and the Europeans find they have to give up.''
Mr. Morrison, however, says he believes the sharply falling dollar has soured the allies' relationships. ``The cozy atmosphere is gone,'' he says.
This atmosphere could be further sullied this weekend when US Trade Representative Clayton Yeutter meets with Willy de Clercq, top trade negotiator for the European Community, to try to resolve the US proposal to impose 200 percent tariffs on some imports.
Even though the Europeans and Japanese are unhappy with the falling dollar, they still have a lot of respect for Mr. Volcker and Baker. ``Their reputations remain very high,'' Horne says.