DOLLAR VALUE APPROPRIATE, BUNDESBANK OFFICIAL SAYS The dollar is near appropriate levels against European currencies and the yen, and a further fall could damage confidence in the currency while endangering world economic growth, a top Bundesbank official said. Board member Leonhard Gleske also told a Forex Association conference current exchange rates of major currencies "can be viewed as equilibrium levels in a medium-term perspective." He said the recent Paris agreement on currency stabilisation and policy coordination between the Group of Five and Canada may herald "an era of greater exchange rate stability." The Paris agreement was not, however, an attempt to set up permanent target zones for exchange rates, Gleske stressed, adding such targets would be extremely difficult to agree and enforce on an international level. "At present levels the dollar can no longer be considered grossly overvalued in relation to the European currencies and the yen," Gleske said. He said the dollar had fallen much less against currencies of important trading nations such as Canada, Korea, Taiwan and Hong Kong, and further falls there may still be necessary. But "a further dollar depreciation against major European currencies and the yen may not be the best way to restore the dollar to a fully competitive position, as measured by its weighted external value," he said. In fact, a further marked decline in the dollar rate would hold two major dangers, Gleske said. First, in countries with large balance of payments surpluses such as Japan and West Germany, it threatened to hamper economic growth and thus slow down the expansion of real income and domestic expenditure necessary to wipe out surpluses. Second, in the United States, it could damage investors' confidence in the dollar and thus reduce their willingness to finance huge fiscal and external payments deficits, Gleske said. Gleske also was strongly sceptical that an international system of binding target zones for currencies, fluctuating in narrow bands against each other, can be established. Such targets threatened to cause policy conflicts, "both within countries and between them." For instance, the U.S. Reliance on foreign capital to fund its deficits requires interest rates there be set at high levels, but domestic considerations call for low ones. If target zones were established, this would put "pressure on other countries to reduce their interest rates even more, even though this may be in conflict with their own domestic situation and priorities," he said. Gleske added, "targeting the exchange rate even within a wide margin will meet with serious objections where there is a clearly perceived potential for conflict between domestic and external policy priorities." Commenting on the Paris currency accord, Gleske said its chances of stabilising exchange rates rested heavily on current interest rate differentials being maintained. These chances "seem to me to rest critically on the expectation that the current configuration of interest rates, and the monetary policies behind them, will assure smooth financing of current account imbalances in the months ahead." Gleske said past experience of currency adjustments had learned "that markets are inclined to be impatient and will thus tend to overshoot." He said this "would seem to be unnecessary and should be avoided if at all possible." Monetary policies can help achieve this, but only if markets believe that pledged changes in fiscal policies will lead to balanced international payments, he said.