Central banks try to halt dollar slide

THE FEDERAL Reserve and the Bundesbank joined forces yesterday with 13 other leading central banks in a renewed attempt to halt the falling dollar.

The intervention, apparently prompted by concern over declines in world stock markets, came in three waves and, according to Group of Seven officials, was intended as a clear signal that the central banks did not want to see the dollar fall further. But it was only a partial success.

The dollar rallied briefly to DM1.4800 from DM1.4600 before the central banks stepped in. But by the London close the US currency was only 0.55 pfennigs up on Monday's close, at DM1.4730. Against the pound the dollar ended 0.7 cents up at dollars 1.9195 but it was barely changed against the yen at Y128.07. In contrast the dollar gained about 3.40 pfennigs to DM1.4935 when banks last intervened in concert on 20 July.

Despite the concerted attempt to set a floor for the dollar the Bundesbank appeared embarrassed by the comments of one of its board members, Johann Wilhelm Gaddum, who said the intervention was meant to calm disorderly markets and not to set a fixed target for the dollar. But few other central banks saw the thin holiday markets as disorderly.

As a result the Bundesbank was obliged to step into the markets after Mr Gaddum's comments to signal that his views did not necessarily represent German central bank policy.

There were also crossed wires in the US. 'We do not wish to depreciate the dollar,' a senior US Treasury official said. 'That is our view and that is the view of others.' But his comments were quickly undermined by Nicholas Brady, the Treasury Secretary, who said US interest rates could ease further, a development which would put downward pressure on the US currency.

World stock markets were depressed further yesterday by new falls in Tokyo. The Nikkei stock average fell below 15,000 for the first time since 1986.

In London the FT-SE 100 index fell 31 points at one stage before ending at 2,309.6, off 16.1. Concern in London also centred on Skipton Building Society's mortgage rate rise.

In New York early yesterday afternoon the Dow Jones Industrial Average was 12.15 down. German shares fell for the second day running to lose 1.1 per cent while the Milan market, worried about possible industrial strife in the autumn, lost 1.23 per cent.

In Tokyo there were loud cries for government moves to stimulate the market, but analysts said there was little the Ministry of Finance could do to halt the slide in the short term.

For several months analysts and government officials had scoffed at the possibility of the Nikkei going below 15,000. At its peak at the end of 1989 it was close to 39,000.

Tsutomu Hata, the finance minister, has asked his ministry's securities bureau to look into ways of reviving confidence in the market. But with banks and developers widely thought to be carrying huge levels of bad loans, and a general downturn in corporate profit forecasts, government hopes for a quick fix seem limited.

In the longer term the minister said he hoped the new fiscal stimulus package to be announced at the end of this month would encourage investors back into the stock market.

'But there is a great deal of scepticism in the market,' said Jesper Koll, chief economist for SG Warburg. 'The problem is that these supplementary fiscal measures have already been so widely leaked that they will surprise nobody when they are officially announced.'

For some months the government has been talking of a supplementary budget in the autumn of 7,000bn yen ( pounds 30bn).

Commentary, page 19