The Dollar Gets No Respect

By Adam Zagorin

When finance ministers and central bankers from as many as 151 nations converged on Washington last week for a meeting of the World Bank and the International Monetary Fund, they had plenty to talk -- and fret -- about. The U.S. and Japan seemed perilously close to a trade war. The value of the American dollar was nose-diving to new lows against the yen. And the Latin- American debt crisis was flaring up all over again. In short, the world economy was showing distinct signs of stress.

On the day before the formal meeting, delegates from the Group of Seven major industrial nations -- the U.S., Japan, West Germany, France, Britain, Italy and Canada -- huddled behind closed doors at the U.S. Treasury to discuss the uncertain situation. At their gathering, Federal Reserve Chairman Paul Volcker undoubtedly emphasized the same understated point he had made to a Senate committee earlier in the week, when he said, "Further sizable depreciation of the dollar could well be counterproductive." The ministers emerged wearily after nightfall with a three-paragraph statement. Its thrust was a reaffirmation of a declaration made by virtually the same group last February in Paris that the dollar's value should remain "around current levels."

The statement was intended to calm foreign-exchange markets, but it had exactly the opposite effect. After the latest Washington communique, a wild , selling spree pushed the value of the dollar down at week's end to 142.50 yen, a 40-year low against the Japanese currency. Indeed, after the Paris declaration failed to halt the dollar's slide, there was no reason to believe a vague reiteration of the same policy would have much impact.

The dollar's continuing plunge created turmoil in U.S. financial markets. As fears mounted that the greenback's weakness would boost inflation, bond prices dropped and interest rates climbed. The rate on 30-year Treasury bonds, for example, reached a 14-month high of 8.18%. The Dow Jones average of 30 industrial stocks closed at 2338.78, down 51.56 points for the week.

The gyrations in the currency markets arose in part from concern about trade tensions between the U.S. and Japan. This week the Reagan Administration is scheduled to slap 100% tariffs on $300 million worth of Japanese goods in retaliation for Japan's failure to live up to a semiconductor trade agreement. At the Washington G-7 session, Japan tried to ease the conflict by unveiling a $34 billion program to stimulate its economy through public works. The spending is intended in part to boost Japanese imports of foreign goods. Although similar programs had done nothing in the past to reduce the country's trade surplus, U.S. officials were hopeful that Tokyo was serious this time.

Also high on last week's agenda was the international debt problem, which heated up last February when Brazil suspended payments on its $68 billion worth of foreign bank loans. Brazilian Finance Minister Dilson Funaro was at the meeting, trying to win support for new credit to his country. He warned that debtor nations were on a "very short lifeline" and "being pushed to the end of their payment capacity." But Funaro received little encouragement from the G-7 representatives, who maintain that Brazil must reform its economy and curb its rampaging 600% inflation rate.

No dramatic cures were proposed for any of the many ills that afflict the global economy. Indeed, the very fact that the world's economic wizards got together with so little result seemed to unsettle investors and traders more than ever.

With reporting by Gisela Bolte and Jay Branegan/Washington