BAKER/STOLTENBERG MEETING SOOTHES MARKETS News of a meeting between U.S. Treasury Secretary James Baker and West German Finance Minister Gerhard Stoltenberg on Monday soothed currency markets, allowing the dollar to recoup much of the day's losses, dealers said. News of the meeting, which took place in Frankfurt in great secrecy, came after the dollar fell sharply on criticism by Baker of West German monetary policy, which had provoked fears that the Louvre pact on currency stability was in jeopardy. The dollar reacted immediately to the news, rising over two pfennigs in after hours New York trading, dealers there said. The announcement of the meeting, also attended by Bundesbank President Karl Otto Poehl, was made simultaneously in Bonn and Washington, timed for after the closure of New York markets. Baker, Stoltenberg and Poehl agreed to pursue the policies accepted under the February Louvre accord, a finance ministry spokesman in Bonn said. The dollar rose to 1.7970/90 marks from New York's close of 1.7730/40. It had closed there on Friday at 1.7975/85 marks. The dollar had tumbled nearly three pfennigs as the market reacted to Baker's criticism of rising West German interest rates, and stock markets crashed worldwide. Baker had said that West Germany was apparently breaching the Louvre accord. Under the accord, leading industrial democracies pledged to coordinate economic policies to foster currency stability, with the surplus countries, West Germany and Japan, stimulating their economies and the U.S. promising to cut its budget deficit. West German government sources said rising West German money market rates could not be seen as a breach of the Louvre pact. They were rather a direct reaction to higher interest rates in the United States. U.S. Bond yields have been rising since May on inflationary fears and in early September the Fed raised the discount rate to 6.00 pct from 5.50. German yields have also risen over this period, but less markedly, and since late September the Bundesbank has nudged up short-term rates by changing the terms on its security repurchase pacts, its principal instrument for steering the money market. The allocation rate on the last facility was 3.85 pct, compared with 3.60 pct. This was partly due to West Germany's inability to uncouple itself from U.S. interest rate trends, but also reflected concern among monetary conservatives in the Bundesbank central bank council about excessive monetary growth, which raised fears of domestically produced inflation, bank economists said. This monetary tightening reflected a switch from the pragmatic line pursued by Bundesbank President Karl Otto Poehl since early this year to stabilise the mark externally, to the more cautious approach of Vice President Helmut Schlesinger. In an apparent gesture to Baker, coinciding with his visit, the Bundesbank repeatedly added money market liquidity this morning. Dealers said this was clearly a move to appease U.S. anger over the most recent West German interest rate rises. "They (the Bundesbank) just don't want to come too much under American fire," said Chris Zwermann, currency adviser at Swiss Bank Corp here. "It seems to me that this is the Bundesbank beating quite a significant retreat from its position," added Giles Keating, economist at Credit Suisse First Boston Ltd in London. The significance that retreat will emerge from the terms of the Bundesbank's next tender for a securities repurchase pact on Tuesday, and its result on Wednesday, money market economists said. Today's injection of liquidity shows that the Bundesbank does not want a further strong rise in the tender allocation rate, which is likely to turn out at between 3.80 and 3.90 pct, little changed from the 3.85 pct on the last facility. The Bundesbank and Finance Ministry had given no indication that the meeting would take place, although the Finance Ministry spokesman said it had been arranged last week. Earlier on Monday the Finance Ministry spokesman, asked to comment on the apparent U.S.-German clash over the Louvre accord, went no further than quoting Stoltenberg as saying he assumed monetary cooperation would continue. The spokesman said he believed Baker had already left West Germany for Sweden on Monday. This week he is also due to visit Denmark and Belgium.