The prospect of renewed assaults on the dollar might force the United States eventually to unveil distasteful measures to bolster support for its currency monetary analysts and economists said. Treasury Secretary James Baker has acknowledged that the Reagan administration discussed the possibility of issuing yen-denominated U.S. government bonds to support the dollar. But he has also dismissed speculation that he was ready to take such an unusual step. Nonetheless monetary sources say the issue has been seriously discussed by the administration. It is unlikely that we would undertake to do that now Baker said last week. In our view there might well be some who would view (issuing U.S. yen bonds) as in fact a lack of confidence by the U.S. in its own currency. And therefore we dont think its an appropriate thing to do. But if the Reagan administration did announce measures they could be a part of an internationally-coordinated effort to end the instability in financial markets with genuine action to reduce massive economic imbalances monetary analysts believe. And like a currency defense package unveiled by the Carter administration issuing yen bonds could be accompanied by a rise in the discount rate now 5.5 pct. The Federal Reserve has resisted pressure to raise this key rate so far chiefly some Fed officials say because it could hurt economic growth. Another concern is the fragile international debt situation. Analysts who expect a currency support package are divided over its possible timing. Some even believe an announcement could come this week during a visit to Washington by Japanese Prime Minister Yasuhiro Nakasone. It would give some real focus to the visit and it might steady the dollar and prevent it from going down said Charles Taylor an analyst with Prudential-Bache Securities. But monetary sources said they thought it unlikely that the Reagan administration would resort to measures which would bring to mind the troubles of President Carter. Until very recently the current administration has urged a lower dollar to help redress its huge trade deficit while Carter faced a weak dollar as confidence in his economic policies collapsed. But today Washingtons policies are increasingly in question. The Carter plan was unleashed on Nov. 1 1978. And it was a resounding success. This package really gave credibility to the administration to get the dollar up said Robert Hormats vice-president of Goldman Sachs Inc and a former senior U.S. economic in the Carter and Reagan Administrations. The dollar then stood at just under 1.87 marks and around 188 yen. Today it stands around 1.79 marks and 139 yen. The problem is now that the administration in rhetoric is evidencing concern about the dollar but in practice is really doing very little Hormats said of statements to support the dollar by U.S. officials. Several currency traders and foreign central bank officials think these statements still fall short of unequivocally saying the dollar has declined far enough. Carter issued 6.4 billion dlrs of mark and swiss franc bonds aimed essentially at buttressing pyschological support for the dollar but also at attracting foreign investors who had lost confidence in the dollar to U.S. government notes. The package was supported by a one pct rise in the discount rate to 9.5 pct drawings on U.S. monetary reserves at the International Monetary Fund and sales of U.S.-held SDRS to other IMF members. It was also supported by increased Fed currency swap lines with other central banks and stepped up official U.S. gold sales. Stephen Axilrod a former Fed official who is now vice-chairman of Nikko Securities said I think its very unlikely they would do that now. He argued that it was politically difficult to take action to support the dollar while Japan and West Germany have still to fulfill pledges to stimulate their economies. But most analysts believe a currency support package would only work if genuine economic measures to redress world trade imbalances are undertaken by the leading industrial powers. It could coincide with the June Venice summit of leaders of the seven major industrial democracies -- the United States Japan West Germany Britain France Italy and Canada. Hormats said he believed the currency has to decline slightly further for a package to have impact. He said the seven nations Paris Accord to stabilize currencies was forged too soon to fundamentally change market sentiment. I think were nearing a point when they would feel (politically) comfortable doing this Hormats said. Many analysts think the administrations reluctance to act firmly on the dollar has been due to its desire to keep up the pressure on its allies to bolster their economies and for fear of fanning protectionist sentiment in Congress. But Hormats said there will be a point at which the government of the United States shows it does give a damn for the dollar.
U.S. MAY HAVE TO ACT TO SUPPORT DOLLAR