Pact to Stabilize Currency Rates Stills Foreign Exchange Markets

Article excerpt

NEW YORK - The major industrial power's agreement to work for stability in currency rates has helped quiet the foreign exchange markets, even in the face of events that normally might depress the dollar.

Yet some analysts say that even without central bank support of the dollar, recent economic and political events would not have generated enough force to pull the currency down from its recent, narrow trading range.

Finance ministers of the United States, Japan, West German, Britain, France and Canada indicated at their Paris meeting a week ago that they were ready to intervene in the currency markets to stabilize exchange rates at roughly current levels.

At the same time, Japan and West Germany agreed to take measures aimed at stimulating their economies, thus presumably increasing demand for foreign products and shrinking their big trade surpluses.

Negative news about the U.S. economy and a renewal of publicity over Third World debt problems gave traders ample opportunity to test the accord.

For example, Brazil announced late on Feb. 20 that it indefinitely would halt payments on $67 billion in commercial debt.

U.S banks hold a $23 billion chunk of Brazil's $108 billion total foreign debt, and any significant halt in payments could wreak havoc with the balance sheets of some major banks. That in turn would tend to weaken the dollar, if investors fled the currency on concerns over the potential impact on the U.S. finanacial system.

In addition, the U.S. government and trade groups pumped out a stream of reports indicating the nation's economy was showing no signs of a sustained upturn.

Separate reports indicated that orders to U.S. factories for durable goods plunged 7.5 percent in January, the biggest drop in almost seven years, and sales of existing homes plunged 14. …