POEHL WARNS AGAINST FURTHER DOLLAR FALL

  Bundesbank President Karl Otto Poehl
  said a weaker dollar would be risky and a further appreciation
  of the mark would damage prospects for sustained West German
  economic growth.
      In a speech to the Institute of Contempory German Affairs
  here, Poehl said "It would be an extremely risky policy to aim
  for a further substantial decline in the value of the dollar to
  correct the trade deficit."
      He said the United States could face a vicious circle of
  depreciation, inflation and more depreciation if it took that
  route.
      Poehl noted West Germany had already taken steps to meet
  U.S. Demands for greater stimulation of its domestic economy,
  accelerating tax cuts, cutting interest rates and tolerating
  above-target money supply growth.
      He said he would have been happy to have brought forward
  five billion marks of tax cuts now planned for January 1988 to
  the beginning of this year, but he said the government faced
  political constraints getting such measures through the upper
  house of the West German parliament.
      But there were also limits to the impact West Germany could
  accept on exports from a rising mark, he said.
      Poehl said West Germany relied on exports for about
  one-third of its gross national product, so a substantial
  erosion of export markets could not be offset by increasing
  demand at home.
      "A further appreciation of the mark could even be an
  obstacle to further growth," he said.
      Poehl said the Bundesbank had tolerated rapid money supply
  growth last year because the country enjoyed low inflation and
  because external factors, including low oil prices and
  favourable terms of trade, had given some extra leeway.
      But Poehl said West Germany now faced a difficult dilemma
  over monetary policy.
      The underlying rate of inflation was now two pct, not the
  reported negative inflation rates last year, and West Germany
  was affected more than before by exchange rate developments.
      "For the time being, we will have to focus our policy more
  on the external side, and we can live with a more expansionary
  money supply. But we must be very careful," he said.
      He said he shared some of the U.S. Concern about Japan's
  trade surpluses, which affected European countries as well as
  the United States.
      Poehl welcomed the so-called Louvre accord of monetary
  officials of major industrialized countries, saying the
  importance of the February 22 agreement to stabilize exchange
  rates had been underestimated.
      All partners had agreed that the dollar was at about the
  right level, and that further changes would damage growth, he
  said.
      "This was a remarkable change in attitude, especially on the
  part of our American colleagues," he said.
      But he said there was still a danger that the correction of
  the dollar's value could overshoot.
  

