Central bank intervention in theforeign exchange markets succeeded in staunching the dollar's
losses today, but senior dealers here believe the U.S. currency
is headed for a further retreat.
    Although the intervention was widespread, dealers perceive
that the six major industrial nations have differing levels of
commitment to their recent accord to stabilize currencies.
    Moreover, hard economic realities hold greater sway over
the currency market than central bank intervention and these
argue for a further dollar decline, dealers said.
    "The market can be bigger than the central banks. And
economic fundamentals will always come to the fore," said a
dealer at one major U.S. bank.
    As the dollar dropped to post-World War II lows against the
yen today foreign exchange traders said the Bank of Japan,
Federal Reserve Board and Bank of England intervened in the
markets on behalf of the U.S. currency.
    Reports of the authorities' actions helped the dollar
recover to about 149.45 yen in New York this afternoon from
the post-war low of 148.20 yen in the Far East. But it still
failed to regain Monday's U.S. closing level of 150.00/05 yen.
    Tokyo dealers said the Bank of Japan bought one to 1.5
billion dlrs in Tokyo today and may also have purchased dollars
yesterday in the U.S. via the Federal Reserve.
    Meanwhile, there were strong rumors in New York that the
Fed also bought a modest amount of dollars around 148.50 yen
today. Talk also circulated that the Bank of England purchased
a small amount of dollars for yen.
    The Fed's last confirmed intervention was on January 28
when it bought 50 mln dlrs in coordination with the Bank of
Japan. But on March 11 the Fed also was rumored to have
signalled displeasure with a dollar surge above 1.87 marks.
    The authorities' actions appeared to back up the February
22 Paris pact between the U.S., Japan, West Germany, Britain,
France and Canada under which the nations agreed to cooperate
to foster exchange rate stability around prevailing levels.
    But foreign exchange dealers were not overly impressed by
the authorities' intervention which they said can only soften
extreme moves in the market.
    For one thing, some dealers believed that the Fed's
purchases were done on behalf of the Bank of Japan rather than
for the U.S. central bank's own account, suggesting a rather  
watered-down American commitment to the currency accord.
    The Bank of England's action also was thought to be
completed on behalf of the Japanese central bank, reinforcing
the market's view that Japan is the most resolute of the six
nations in its support of the currency pact.
    "No-one doubts the Bank of Japan is serious. But the other
two central banks seem to be making more token gestures than
anything else," said Chris Bourdain of BankAmerica Corp.
    "I'm not convinced the intervention was concerted," said
Earl Johnson of Harris Trust and Savings Bank in Chicago. 
"It's a yen problem more than anything else."
    Some dealers said a rising wave of trade protectionist
sentiment in the U.S. limits the extent to which the American
authorities can endorse a stronger dollar against the yen.
    "The dollar's break below the key 150 yen level ties the
Treasury's hands behind its back. The U.S. cannot intervene on
its own account because of the strength of protectionism here,"
said Albert Soria of Swiss Bank Corp.
    Such comments reflect the view that the currency markets
are becoming increasingly politicized. Despite official
denials, some traders still feel the U.S. would countenance a
lower dollar to help trim the nation's trade deficit.
    The majority of the 170 billion dlr merchandise trade
deficit in 1986 was with Japan.
    Indeed U.S. Treasury secretary James Baker's comment on
Sunday that the February currency pact had not established
dollar targets was read by the market as a signal to sell the
U.S. currency and kicked off the latest retreat.
    "The dollar still has more room on the downside against the
yen based on the frictions in trade and financial services. The
currency market is becoming very political," said Natsuo Okada
of Sumitomo Bank Ltd.
    Okada expects the dollar to trade between 148 and 150 yen
this week but sees the chance of a drop to 140 yen by the end
of April or early May.
    Even if West Germany and Japan succeed in stimulating their
economies, it may not be enough to solve structural economic
imbalances in the near future, dealers said.
    "Even if Japan and West Germany do expand this year, it
won't be enough to help the trade situation much," said
Bourdain of BankAmerica, who also expects the dollar to drop to
148 yen in the next couple of days.
 Reuter
