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APPENDIX



NOITS

FDR

F.O.M.C.

EEl'lX

Aqust

18,

I981

slm

Y.

cross



Hr.

Chairman, since the Cornittee's last meeting, one theije

uncil

this past week had been the strengthening

of

the dollar, which

has

moved higher against all currencies, up to

levels

not generally seen

since

1916.

The net increases during the first five veeks of the six-weekperiod had been, against the German mark, and currencies :hat sove vith

it,

more than 2-1/2 percent; against :he yen, nearly

1

percent; againstthe pound sterling, nearly

5

percent; and against

:he

Canaeian dollar,

more

chan

2

percent.

The

dollar's continuing strength during

that

period

as

actributed

to

a

broad range

of

economic and political influences.

Let

me cor,ent onehree factors:First, interest rates. k-nile some Europeans ten$ to exzggerate

..

grossly the inportance

of

this fac:or,.cont;nuing high

U.S.

in:erest ratesare certainly one element of the picture. Tnere seems

little

doubt

in

cheexchange rsarkets that

U.S.

rates

will

remain fairly high for

a

while,

based

on

reasoning you are familiar vith--the

Fed's

commitment

to

restrictive

policy, the fiscal effects

of

the

tax

cut and higher defense spending, theheavy schedule

of

U.S.

Treasury borrowing. Tnere

is

also an expectationtha:

if

U.S.

in:eresc rates do decline somewhat the Europeans might be quickto follow, and thus :lie dollar night not be zeakened much thereby.

2



Second, balance of payments. Although current account surplus ofthe United States, concrasted with deficits

in

continental Europe through

the

first quarter, underpinned the dollar's appreciation

earlier,

currentaccount considerations do not appear to be a major factor

im

the exchangenarket at present and probably of much less importance than capital

flows.

Third, political and security factors. These may be zmong theiiost important factors of all--at least they are increasingly cited in thenarket. Wehear frequent comments about what

is

described as

the

marketcontrast between &he United States, which

is

showing strong leadership andeffective government, and

is

acting to improve

its

economy and strengthen

its

defenses, and Europe, here there are signs

of

what

is

seen

as

drift,divisiveness, and in some cases neutralism.

Of

course some central banksand others may be talking this way simply

to

put pressure

on

their

own

government. But

it

does look

as

though the incentives for political flows

of

capital are in one direction,

with

riots

in

the

U.K.,

concern overHitterrand's program in France, and events

in

Poland a constant reminder thatGermany

is

potentially

a

frontier state. Even the

U.S.

decision

on

the

neutron bomb was videly cited as having

a

strengthening effect

on

the dollar.

.

Against this background there have been periods of substantialintervention by other central banks, and markets sometimes characterized by aconsiderable amount

of

choppiness and uncertainty. Three situations are vorthnent ion:First, the German move

for

concerted intervention.

On

August

4

thejundesbanic mobilized the

EXS

nenbers,

plus

Switzerland, in a concerted effort to

of 00

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