BUSINESS

Supporting the dollar

ANN FINLAYSON March 9 1987
BUSINESS

Supporting the dollar

ANN FINLAYSON March 9 1987

Supporting the dollar

It has been a relentless decline. Since September, 1985, when the world’s major industrialized nations met to devise ways to slow the flight of the soaring U.S. dollar, the greenback has lost more than 40 per cent of its value against other major world currencies. The United States encouraged the precipitous drop in a bid to make its exports more competitive and reduce its lopsided $225.8-billion trade deficit. But when the finance ministers and government banking officials from the same countries met in Paris last week, they agreed that the dollar had tumbled far enough. Any further drop, they concluded, could severely damage the West German and Japanese economies. As a result, the group developed a strategy—which Canada later endorsed—to gradually reduce the U.S. trade deficit without a further depreciation of its dollar.

The so-called Group of Five—the United States, Britain, Japan, West Germany and France—announced that they had agreed to “co-operate closely” to limit fluctuations in the dollar. Indeed, Britain’s chancellor of the exchequer, Nigel Lawson, said after attending the meeting that G5’s central banks made a secret agreement to keep the dollar “at around current levels.” West Germany and Japan also vowed to take measures that would boost the growth rates of their economies, in the process making room for more U.S. imports. And for its part, the United States pledged to reduce its $230.3-billion domestic budget deficit, which is causing economic uncertainty and putting downward pressure on the dollar.

Some analysts questioned whether the central banks of the G5 nations had the massive amounts of U.S. dollars that they may need to stabilize the U.S. currency indefinitely. But otherwise, reaction to the G5 accord was generally favorable. Said Helmut Henschel, deputy head of the economics division of the Westdeutsche Landesbank Girozentrale in Düsseldorf: “At least it had the merit of stopping the dollar from crashing through the floor.” And in its first week of operation, the accord seemed to be working. Even concern over the Brazilian debt crisis and a sharp drop in the price of crude oil failed to budge the dollar, which remained steady against most major currencies.

-ANN FINLAYSON in Toronto