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.
  

