A Day to Remember
November 1, 2023
Today is the 45th anniversary of one of the dollar’s most influential days since the major western industrialized countries switched in March 1973 from a foreign exchange environment characterized by fixed dollar rates to one featuring flexible dollar exchange rates determined largely by market forces.
The dollar had faced selling pressure since mid 1977 that became increasingly one-sided in late summer 1978. Dollar depreciation and accelerating U.S. domestic inflation became a self-reinforcing market dynamic, and it didn’t help that President Carter’s Treasury Department was perceived as almost welcoming the dollar’s decline to more competitive levels as a development that would promote faster economic growth. That depiction would change after a series of radical actions announced by the president at 09:00 from the White House.
The so-called dollar rescue plan included steps that increased U.S. foreign exchange resources by $30 billion to finance currency market intervention, an unprecedented full percentage point hike in the Federal Reserve discount rate, an increase in reserve requirements on large time deposits, and the go-ahead for the Fed and U.S. Treasury to conduct waves of forceful dollar purchases against sales of Deutsche marks, Swiss francs and Japanese yen. From Halloween night lows in the Far East of DEM 1.703 per USD (with a euro translation value of $1.148) and JPY 176 per dollar to the New York closing levels on November 1, 1978, the dollar advanced between 7% and a tad over 10% against other major currencies.
The intervention was not unilateral, as other major central banks joined in the fight, and the dollar’s trajectory then and in coming days was far from linear as markets endeavored to test the new resolve of U.S. authorities to defend the U.S. currency. Not until a year later when the Fed under former Chairman Paul Volcker adopted a policy oriented not to an interest rate but rather to containing growth in the money stock did a sustained recovery of the dollar commence. But the fuse had been set on November 1, 1978 when U.S. officials realized that the fight to restore internal price stability in America had to be integrated with a companion commitment to stabilize the external value of the U.S. currency, that is embodied in exchange rates.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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