175. Briefing Memorandum From the Acting Assistant Secretary of State for Economic and Business Affairs (Hormats) to the Deputy Secretary of State (Christopher)1

SUBJECT

  • Market Reacts to Measures to Support the Dollar

Market reaction to the forceful measures announced this morning (Tab 1) was immediate.2 The dollar experienced a strong recovery in hectic trading. Within an hour after the announcement, the dollar moved by as much as 5 percent against major currencies. The deutschemark/dollar rate moved by mid-morning from yesterday’s fixing of [Page 532]1.74 to 1.85, and during the same time the yen/dollar rate moved from 178 to 187. The pound sterling on the London Exchange plummetted from $2.11 to $1.97. Wall Street welcomed the new measures and within two hours after the announcement the Dow Jones Industrial Average was up 20 points. The price of U.S. Treasury Bills increased noticeably as investors attempted to shift their portfolios into dollar denominated assets.

The price of gold immediately fell after the announcement of the Administration’s intention to intervene in exchange markets in order to support the dollar. The London gold fixing closed today at $225.00 per ounce compared to a price of $242.60 yesterday afternoon.

Most traders agree that the new measures were announced at the right psychological moment. The sudden move caught many traders off guard and as a result they have realized exchange losses from going short on dollars. The announcement has also caused severe foreign exchange fluctuations in forward markets.

The Deutsche Bundesbank has publicly endorsed the Administration’s new measures and announced that it stands ready to cooperate with the Federal Reserve in market interventions. The Japanese Government welcomed the actions to support the dollar and the Finance Minister expects that they will help stabilize the international monetary system. The Swiss National Bank has expressed its great satisfaction of the measures to strengthen the dollar and feels that the U.S. program will have the intended effect.

The U.K. will have no direct involvement in the support of the dollar, but the Prime Minister has expressed his approval of the program and his belief that it will dampen speculative capital movements.

The Administration’s complete package and its effects on exchange markets will take time to evaluate. The use of foreign currency denominated securities is a major innovation and a sure signal that we are dead serious. The Administration’s strong and decisive action has caused exchange losses for people who thought that the dollar could only continue its decline. Speculators will likely be more cautious in the future, which may help moderate exchange rate movements.

The Department of State played virtually no role in the developing and assembling of the Administration package.3 Treasury informed us that the Secretary was informed at some point, but Under Secretary [Page 533] Cooper was not involved. It appears that the program was put together in the October 28–31 period, when Cooper was out of the country.4

  1. Source: National Archives, RG 59, Office of the Under Secretary for Economic Affairs, 1978–1980 Files Pertaining to International Monetary Affairs, OECD, Documents, External Research, Etc., Lot 81D145, Box 1, Exchange Rates. Limited Official Use. Drafted on November 1 by John Lefgren (EB/IFD/OMA) and cleared by Acting Deputy Assistant Secretary of State for International Finance and Development Michael Ely. Printed from a copy that does not bear Hormats’ initials. A handwritten notation at the top of the page reads: “Tab 2, Nov. 1, 1978.” The memorandum was Tab 2 of a November 1 memorandum from Thomas Forbord of the Office of Monetary Affairs to Cooper; Forbord’s memorandum notes that Hormats’ memorandum had been prepared at Christopher’s request. (Ibid.)
  2. Tab 1, attached but not printed, is an undated paper describing the administration’s dollar support program. On November 1, Blumenthal announced a series of measures designed to shore up the value of the dollar. The program included an increase in the Federal Reserve discount rate from 8.5 percent to 9.5 percent; imposition by the Federal Reserve of a 2 percent supplementary reserve requirement on time deposits exceeding $100,000; increases in monthly Treasury gold sales; and coordinated foreign exchange market invention by the United States, West Germany, Japan, and Switzerland. Backing this market intervention were facilities in the amount of $30 billion, secured through a U.S. drawing on the IMF; SDR sales to West Germany, Japan, and Switzerland; increases in U.S. swap arrangements with West Germany, Japan, and Switzerland; and issuance of U.S. securities denominated in foreign currencies. For the text of Blumenthal’s announcement of the program, as well as Carter’s introductory remarks, see Public Papers of the Presidents of the United States: Jimmy Carter, 1978, Book II, pp. 1908–1910.
  3. In his November 1 memorandum to Cooper (see footnote 1 above), Forbord noted that developments in the foreign exchange market just before the announcement of the dollar support program, “largely reflecting disappointment over the Administration’s anti-inflation program, precipitated the forceful U.S. response. Advance notice (about a half hour) of the U.S. announcement was given to the French and British Governments.”
  4. Cooper visited Iran October 26–31 and Kuwait October 31–November 1 to discuss oil prices before the upcoming OPEC meeting. At the end of the memorandum, Forbord added a handwritten note: “Exchange rate changes at 4 p.m. from yesterday’s close: DM −6.5%, FF −5.6%, SF −6.4%, ¥ −4.9%, £ −4.1. During the day, the Federal Reserve did some intervention to support the dollar; trading was hectic and confused. Tom F.”