155. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Bergsten) to Secretary of the Treasury Blumenthal 1

SUBJECT

  • Foreign Exchange Market Conditions

Market behavior indicates a lack of confidence in the U.S. Government’s ability to deal with the fundamental U.S. problems of inflation, energy policy and trade. Monetary policy is regarded as no longer effective, fiscal policy moves as unlikely in the near future, and the anti-inflationary program as a failure. The market sees the Administration as resigned to await future developments, which may, over the horizon, be helpful but which offer no present incentive to hold dollars. Adjustment by Japan, in particular, is seen as a long-term process. There is no fear, at present, that the U.S. will impose controls, either domestically or over capital movements.

The market does not appear to be very sensitive to or cautious about the record low dollar exchange rates. There is little caution [Page 492]among traders in pursuing the practice of selling dollars, covering positions, and selling more dollars. Interest rate differentials are not important factors. The market remains dominated by the professionals; that is, while corporations and foreign governments have undoubtedly been trimming dollar positions, there is a large potential for further shifts out of dollars. The professionals are able to deal on this presumption.

The market is aware that official intervention is now ineffective, and that foreign monetary authorities are no longer even seeking to curb rate movements by large intervention.2 The state has been reached where, in the absence of some highly visible political action, intervention expenditures are simply swallowed up. There are no credible trading levels which seem to be dependable.

The main contribution of intervention by the United States is to demonstrate to foreign authorities, as well as to the market, that the U.S. continues to adhere to its policy, that we are concerned about disorderly market conditions and that we continue to operate to counter such conditions. The question is how much we should spend in pursuing this objective.

  1. Source: National Archives, RG 56, Records of Assistant Secretary of the Treasury for International Affairs C. Fred Bergsten, 1977–1979, Box 2, International Monetary. Confidential. Drafted by Fred Springborn and reviewed by Widman and Hessler. A stamped notation reads: “Noted by W.M.B.” Bergsten wrote at the top of the page: “Mike—This is rough but, I’m afraid, an accurate picture. New lows today re all European currencies. Fred.”
  2. Attached but not printed is an “Intervention table showing daily intervention in dollars by the U.S., Germany, Switzerland and Japan since July 1.”