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U.S. Buys Dollars and _ Surprise _ Currency Market Reacts Favorably

August 16, 1995

WASHINGTON (AP) _ The Clinton administration, after struggling to find the appropriate way to handle the dollar, may finally be getting the hang of it.

Since May, it has intervened with other countries on three occasions and _ surprise of surprises _ the markets reacted favorably.

The latest success was Tuesday when the United States, Japan and Germany joined in an unexpected buying spree that lifted the dollar to its highest levels in nearly six months against the Japanese yen and the German mark.

The dollar touched 99.05 yen at one point in Tokyo this morning but settled at 98.15 yen by late in the day in Japan, up 3.27 yen from late Tuesday in that market. The currency was quoted at 97.81 yen today in Europe.

Market reaction to the latest intervention was in marked contrast from earlier this year, when the U.S. currency was pummeled in the $1 trillion-a-day world currency market, falling to a string of post-World War II lows.

Analysts said the difference in the three successful efforts Tuesday and on Aug. 3 and May 31 was timing.

On each occasion, the administration and its allies caught the market off guard by intervening to buy dollars while the U.S. currency was rising.

In previous attempts, it had only intervened when the dollar was under heavy downward pressure.

``They had given intervention a bad name because it was woefully ineffective,″ said Elliott Dix, a market analyst at Ruesch International in Washington.

He said the failures may have pushed the dollar lower as traders were emboldened to take bigger and bigger bets that it would fall further.

Analysts see a big role in the switch in strategy being played by Treasury Secretary Robert Rubin, who succeeded Lloyd Bentsen in January.

Bentsen’s tenure was marked by a series of missteps in currency policy, starting when he sent an early signal that the administration wouldn’t mind seeing the yen strengthen against the dollar as a way of reducing the huge U.S. trade deficit with Japan.

While Bentsen quickly disavowed the comment, the markets were never convinced the Clinton team didn’t have a secret strategy of talking down the dollar to pressure Japan to open up its markets.

Rubin, who once ran the currency trading operations at Goldman Sachs, has not made any such missteps. Instead, he has repeatedly insisted that the administration would not use the dollar as a weapon in trade conflicts.

In addition to well-timed interventions, analysts said the dollar’s recent strength _ it has risen 10.3 percent against the yen and 6.2 percent against the mark in the last month _ could be credited to policy changes in Germany and Japan.

On Aug. 2, Japanese Finance Minister Masayoshi Takemura unveiled a package of measures designed to encourage Japanese institutional investors to put more of their money abroad, a move aimed at reversing their trend of abandoning the U.S. market.

``The United States, Japan and Germany have all given powerful signals that they are on a course of moving the dollar significantly higher,″ said Allen Sinai, chief economist at Lehman Brothers Global Economics.

``This is the most brilliantly conceived currency strategy since the Plaza accord,″ Sinai said, referring to a joint commitment by the United States and its major allies in September 1985 to push the overvalued dollar lower to boost American manufacturing exports.

While economists gave rave reviews to the U.S. effort Tuesday, the stock market fell. Some analysts blamed the 19-point drop on worries that the stronger dollar would hurt U.S. export growth.

But Bruce Steinberg, senior economist at Merrill Lynch, said the markets were wrong to be worried about the dollar’s rebound. He predicted the U.S. trade deficit would narrow significantly in coming months, noting a report from Tokyo on Tuesday that the Japanese surplus with the United States narrowed sharply in July.

``The dollar got so grotesquely undervalued that even at these new levels U.S. companies have significant cost advantages,″ Steinberg said.

Many analysts said declines in the yen and mark, by boosting the sluggish Japanese and German economies, could help American manufacturers.

They said a stronger dollar would also have the beneficial side-effects of easing inflationary pressures at home by making imports less expensive, giving the Federal Reserve further room to cut interest rates to boost domestic growth.

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