Germany says US policies to blame for weakness of dollar

THE weakness of the dollar is largely the Americans' own fault, Gunter Rexrodt, the German Economics Minister, said yesterday in an unusually forthright criticism of the US adminstration before tomorrow's summit of the Group of Seven leading industrial countries in Naples.

Mr Rexrodt singled out the swelling US budget deficit, uncertainty about key reforms like health care, and clumsy handling of the trade dispute with Japan as factors behind the dollar's dive.

In an interview with the Suddeutsche Zeitung, Mr Rexrodt said the political and economic uncertainty prevailing in the US, leading to doubts about the consistency of President Bill Clinton's policies, had mainly provoked the haemorrhage of foreign capital, notably Japanese, from long-term dollar investments.

The uncertainty was increased by efforts to prop up the dollar through co-ordinated central bank intervention, according to Mr Rexrodt, who said the Bundesbank had been obliged to take part against its judgement.

The support action proved in vain, as the dollar slid to a record low against the yen. 'The German view that intervention against the market trend cannot succeed was once again proved correct,' he said. The minister's comments strengthened earlier indications from the Bonn government that it does not favour a big iniative to support the dollar at the G7 summit.

The Bundesbank yesterday eased its key money market rate, the securities repurchase rate, three basis points to 4.93 per cent.

But the dollar had another nervous day yesterday, easing more than half a yen to Y98.09. Mr Rexrodt's remarks pushed the dollar 1.57 pfennigs lower to a closing DM1.5683. Sterling was pulled lower by the falling dollar, hitting a 15-month low of DM2.4255 before recovering to a closing DM2.4320, down 0.7 pfennigs on the previous finish.

Mr Rexrodt pinpointed the awkward American handling of the trade dispute between Washington and Tokyo as particularly damaging for the dollar. The US first let markets believe it favoured a rising yen to force the Japanese hand, only to then worry about a free-falling dollar. The contradictory statements only aggravated market instability, said Mr Rexrodt.