Europeans jawbone the dollar. White House, meanwhile, lowers its economic forecast for '88
World finance ministers are trying to talk the dollar into stability. Yesterday, West German and British finance ministers termed the United States currency ``undervalued,'' and predicted the greenback might rise in value soon.
The dollar jawboning in Europe followed a statement on Tuesday evening by the Group of Seven that the dollar had fallen far enough. Currency traders generally considered the statement by the G7 to be disappointing. The G7 is made up of the US, Japan, West Germany, France, Italy, Canada, and Britain.
``The statement was not that potent,'' said Chris Mandell, financial market adviser to Barclays Bank in New York.
Currency markets were generally muted yesterday. But many experts said this was because of the holidays and not because of any stabilizing influence of the G7 statement. In thin trading, however, the dollar rose compared with the West German mark and the Japanese yen.
Separately, the White House yesterday lowered its economic forecast for 1988 but projected no recession. Beryl Sprinkel, chairman of the Council of Economic Advisers, predicted the nation's gross national product would rise by 2.4 percent, down from a prediction of 3.5 percent made this past August. Mr. Sprinkel predicted the Consumer Price Index would rise by 4.3 percent - about current levels - and both long- and short-term interest rates would fall, reflecting the slower economy.
Sprinkel blamed the lower forecast on the impact of the Oct. 19 stock market crash and a general tightening of monetary policy.
Lower economic growth in the US might actually be beneficial for the dollar. ``One should be hoping the US economy will take a breather next year,'' says Richard O'Brien, chief economist for American Express Bank in London. He reasons that slower growth will result in fewer imports, thus benefiting the trade deficit.
Sprinkel predicted that the trade deficit would improve next year in both volume and dollar terms. Even though US exports have increased this year by 20 percent, the improvement in the trade deficit has been nominal. Volume has gone up, but the dropping dollar has decreased the value of these exports.
Some economists, however, do not expect the trade deficit to show rapid improvement. ``We are not expecting the trade figures to be very good,'' says Evelyn Brodie, an economist with the London investment banker Morgan Grenfell.
The G7 indicated there were also risks in a rising dollar. A senior Reagan administration official at a briefing for reporters also said some countries have an ``explicit agreement'' on how high the dollar could rise.
Yesterday, Nigel Lawson, Britain's chancellor of the exchequer, and Gerhard Stoltenberg, West Germany's finance minister, said the dollar was undervalued. ``It's possible the dollar could rise,'' said Karlheinz von den Driesch, a spokesman in Bonn for the Finance Ministry. In September 1975, the G7 successfully talked the dollar down in value. This past February it stabilized the currency for seven months. Since then, the greenback has fallen.
In its lengthy statement, the G7 did not talk about any specific policy changes to strengthen the dollar. The G7 statement was timed for release after the US budget package was signed by President Reagan.
Many economists, however, view the fiscal year 1988 budget deficit of $150 billion as an Achilles' heel for the US. The US must decrease consumption or increase savings if it is to fund the deficit without foreign capital. Increasing savings might entail rising interest rates. Rising interest rates could act to send the economy into a recession - something the administration is likely to avoid since 1988 is an election year.
Given the limited policy alternatives, traders are convinced dollar stability will not last for long. ``There is only one way for the dollar to go,'' says Ms. Brodie, ``and that is down.'' Ms. Mandell, likewise, says, ``We don't see aggressive intervention'' by the central bankers in the currency markets.
Since the markets will be dormant until the New Year, the G7 will have some breathing room before the first challenge to its statement. In addition, with the price of oil falling, the US trade numbers should begin to improve somewhat. This could help stabilize the dollar as well. ``I think they [the finance ministers] have bought themselves some stability right now,'' says American Express Bank's Mr. O'Brien.