Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

142. Memorandum From the Under Secretary of the Treasury for Monetary Affairs (Solomon) to the Special Representative for Economic Summits (Owen)¹

Washington, July 7, 1978

SUBJECT

• Probable Foreign Exchange Market Reaction to the Bonn Summit

The market will be most sensitive to what the President says about energy and inflation, Chancellor Schmidt says about German growth, and the Europeans say or decide to do about European monetary arrangements.² Decisions or statements on North-South issues, the MTN, and general energy policies are not likely to have a significant market impact.

Some pre-summit dollar selling has already taken place, in the expectation of minimal success at the Summit, but this movement has been limited, and the market may go either way depending on the results of the meeting. A summit “failure” has not been discounted. Heavy dollar selling is possible if: (a) the President is unable to offer reasonable assurance on limiting oil imports, either by Congress or administrative action, (b) Schmidt does not announce his intent to stimulate the German economy, and (c) the Europeans announce a regional arrangement for “monetary stability” which is perceived as a means of insulating themselves from a falling dollar. Obviously, an appearance of a breakdown in cooperation between the U.S. and Europe could cause heavy dollar selling.

The market is probably not expecting the President to announce further actions against inflation, and if significant new measures were revealed, the market would tend to react positively.

The President’s position on European currency arrangements will be closely observed. A blanket endorsement, without qualifications, is likely to be taken as a sign of U.S. weakness and lead to an effort to shift out of dollars. If a Presidential endorsement of the general effort to improve EC cooperation were carefully qualified, however, to demonstrate U.S. concern about the implications of possible detailed arrangements for the global monetary system and the dollar, such a reaction could be minimized.

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Brzezinski Office File, Subject Chron File, Box 111, President’s Europe Trip: 7/78. Confidential.
2. On July 6 and 7, the EC Heads of Government met in Bremen where they considered, among other issues, the establishment of a European Monetary System. Solomon discussed how the EMS might affect the United States in a July 10 memorandum to Owen. (Carter Library, Staff Office Files, Council of Economic Advisers, Charles L. Schultze Subject Files, Box 29, European Monetary Arrangement) See also Document 143.