DOLLAR VALUE APPROPRIATE, BUNDESBANK OFFICIAL SAYS

  The dollar is near appropriate levels
  against European currencies and the yen, and a further fall
  could damage confidence in the currency while endangering world
  economic growth, a top Bundesbank official said.
      Board member Leonhard Gleske also told a Forex Association
  conference current exchange rates of major currencies "can be
  viewed as equilibrium levels in a medium-term perspective."
      He said the recent Paris agreement on currency
  stabilisation and policy coordination between the Group of Five
  and Canada may herald "an era of greater exchange rate
  stability."
      The Paris agreement was not, however, an attempt to set up
  permanent target zones for exchange rates, Gleske stressed,
  adding such targets would be extremely difficult to agree and
  enforce on an international level.
      "At present levels the dollar can no longer be considered
  grossly overvalued in relation to the European currencies and
  the yen," Gleske said.
      He said the dollar had fallen much less against currencies
  of important trading nations such as Canada, Korea, Taiwan and
  Hong Kong, and further falls there may still be necessary.
      But "a further dollar depreciation against major European
  currencies and the yen may not be the best way to restore the
  dollar to a fully competitive position, as measured by its
  weighted external value," he said.
     In fact, a further marked decline in the dollar rate would
  hold two major dangers, Gleske said.
      First, in countries with large balance of payments
  surpluses such as Japan and West Germany, it threatened to
  hamper economic growth and thus slow down the expansion of real
  income and domestic expenditure necessary to wipe out
  surpluses.
      Second, in the United States, it could damage investors'
  confidence in the dollar and thus reduce their willingness to
  finance huge fiscal and external payments deficits, Gleske
  said.
      Gleske also was strongly sceptical that an international
  system of binding target zones for currencies, fluctuating in
  narrow bands against each other, can be established. Such
  targets threatened to cause policy conflicts, "both within
  countries and between them."
      For instance, the U.S. Reliance on foreign capital to fund
  its deficits requires interest rates there be set at high
  levels, but domestic considerations call for low ones.
      If target zones were established, this would put "pressure
  on other countries to reduce their interest rates even more,
  even though this may be in conflict with their own domestic
  situation and priorities," he said.
      Gleske added, "targeting the exchange rate even within a
  wide margin will meet with serious objections where there is a
  clearly perceived potential for conflict between domestic and
  external policy priorities."
      Commenting on the Paris currency accord, Gleske said its
  chances of stabilising exchange rates rested heavily on current
  interest rate differentials being maintained.
      These chances "seem to me to rest critically on the
  expectation that the current configuration of interest rates,
  and the monetary policies behind them, will assure smooth
  financing of current account imbalances in the months ahead."
      Gleske said past experience of currency adjustments had
  learned "that markets are inclined to be impatient and will thus
  tend to overshoot." He said this "would seem to be unnecessary
  and should be avoided if at all possible."
      Monetary policies can help achieve this, but only if
  markets believe that pledged changes in fiscal policies will
  lead to balanced international payments, he said.
  

