View from City Road: Dollar will have the last word

Financial markets had another nail- biting session yesterday. European markets followed the dollar, Treasury bonds and Wall Street lower. Other than dollar weakness, there was no apparent cause. On the economic front, there was hardly anything to react to. This was just nerves.

Perhaps New York traders should pop a few Prozac, the happiness drug. Their nerves would be in better order, however, if members of the Federal Reserve and US administration learnt not to contradict each other.

The trigger that shot the dollar to a new post-war low against the yen was an off-the-cuff comment by the US Treasury Secretary, Lloyd Bentsen. Sure, he'd like to see a higher dollar, he told reporters, but there were no plans to intervene in the market.

The Treasury Under-Secretary, Lawrence Summers, rushed to the rescue with a 'clarification' of his senior's remarks. In a television interview he said there were times when intervention was appropriate.

This muddle is less important than the conflict within the Federal Reserve Board, however. The interest rate hawks agree that economic growth is too high and another policy tightening is overdue. Yet a majority of Fed governors are evidently doves.

What's more, they are all too willing to make speeches about their views.

The latest was the Cleveland Fed president, Jerry Jordan, who told an audience in London on Thursday that rapid increases in output were not inflationary because the Fed's policy had been so successful at holding down price increases so far.

Unfortunately, Wall Street traders are not the kind of people who react well to the message: 'Don't worry, guys, we have everything under control.'

Investment fundamentals point to dollar assets staying unattractive for some time. Inept statements from US policy-makers do not help matters.

The time is fast approaching when dollar weakness - it has lost a quarter of its value against the yen since President Bill Clinton took office - will force an interest rate rise regardless of what the policy-makers think.