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

46. Memorandum From the Under Secretary of the Treasury for Monetary Affairs (Solomon) to Secretary of the Treasury Blumenthal¹

Washington, July 26, 1977

SUBJECT

• Exchange Rates and U.S. Exchange Market Policy

I thought it would be useful to place recent exchange market developments in a historical context.

1. The recent movements in exchange rates are by no means unprecedented: since early 1973, while there have been long periods of relative stability, there have also been times when the dollar exchange rate—against individual currencies and on a trade-weighted basis—has gone through swings much wider than those of the past month.

—The dollar rate against the DM, to take a key example, has moved by as much as 17 percent in one four-month period, and by 8–13 percent on several occasions.

—The weighted average rate for the dollar has moved by 4–10 percent on six occasions.

—These figures compare with changes in the rate against the DM and the trade-weighted rate of 4½ percent and 1½ percent respectively in the past month.

—For the period of floating as a whole (since March 1973), the DM has appreciated by 25 percent. The yen has depreciated by 2.6 percent. Again for the period as a whole, the dollar itself has appreciated by about 5 percentage points on a trade-weighted average basis.

2. U.S. policy throughout this period has been to rely on the markets to determine the exchange rate and to limit U.S. intervention to that needed to counter disorderly market conditions. The largest U.S. market operations during the period have been to acquire foreign currency needed to liquidate swap debt, to repay the IMF, and to pay down Treasury foreign currency issues accumulated prior to the elimination of gold convertibility in 1971. These operations are not designed to influence the market.

3. The one episode of “substantial” U.S. intervention to influence the market was during the six month period October 1974–March 1975. The DM appreciated by about 17 percent against the dollar, and the dollar depreciated by about 4 percent on average. Markets were frequently disorderly, as the U.S. slid into recession with no clear corrective policy. U.S. intervention amounted to $1.4 billion in this period, financed largely through U.S. drawings on the swap lines. When U.S. economic indicators improved and the market turned, the U.S. intervened on the other side and repaid the swap debt.

4. Recent movements in rates and market uncertainty are not difficult to understand. Our trade and current account positions have moved into heavy deficit. There are doubts that we will solve our energy problem or control inflation. And there is a general perception that we are “talking the dollar down,” at least against the DM and the yen.

5. We do not need to change our intervention policy. The market has been speculative at times, but on the whole has been orderly. The Fed has intervened modestly at times to counter disorderly conditions. An effort to stop the movements—through massive intervention or statements that rate movements have gone “far enough”—would be tested by the market and would run a high risk of failure. It would also represent a failure not only of exchange rate policy but also of our policy to bring about an orderly adjustment of imbalances. We have advocated flexibility in exchange rates to bring about adjustment—and we should not be surprised when rates move.

6. On the other hand, we can contribute to a calmer market atmosphere:

—by refraining for the time being from statements that unsettle the market;

—by pointing to the fundamental strength and improvement of the U.S. economy; and

—by persisting in the effort to deal with energy and control inflation as the only effective way of assuring a strong dollar.

Attached are:

a) A summary table on periods of dollar depreciation and U.S. intervention in support of the dollar.²

b) The table on foreign intervention and rate movements you requested this morning.³

c) The talking points on the exchange rate I sent you last week.⁴

1. Source: Carter Library, Anthony Solomon Collection, 1977–1980, Chronological File, Box 2, 7/15/77–7/31/77. Confidential; Nodis. Sent for urgent information. Drafted by Leddy and Springborn and reviewed by Cross. Solomon did not initial the memorandum. Attached is an undated note that reads: “Noted by the Secretary & returned.” (Ibid.)
2. The attachments are attached but not printed. Attachment a is a table entitled “Depreciation of Dollar: Rates and U.S. Intervention in “Support” of Dollar (Selected Period, March 1973–Present).”
3. Attachment b includes an undated note on “Exchange Market Intervention by Major Foreign Countries” and a table entitled “Official Market Intervention in Dollars by Major Foreign Central Banks.”
4. Attachment c is an undated paper entitled “Suggested Talking Points” and a July 20 cover memorandum from Solomon to Blumenthal in which Solomon noted that “the markets continue to be unsettled. If the situation continues, it may become desirable or necessary for us to comment in order to try to calm the situation, though without changing our substantive position. (For the moment, I continue to think it best that we minimize public statements to the extent possible and that it is preferable to make any moments that are necessary on a background basis.)”