RISE IN THE FOREIGN EXCHANGE

Dominion, Volume 11, Issue 12, 9 October 1917, Page 8

RISE IN THE FOREIGN EXCHANGE

AMERICAN BANKERS PUZZLED

A condition of affairs in which tho 6tate of tho exchanges and efforts to remedy it might have a direct bearing on the commercial policies of the Allies and on the blockade of Germany is considered a possibility in foreign-exchange circles' (says the. New York "Juvenilis Post," in a recent issue, apropos of a puzzling movement in the foreign exchange rate in neutral European markets). In tho opinion of one prominent foreign exchange dealer, gold has temporarily lost its function, and a modified state of barter in international dealings may be tho outcome. "The neutral countries do not want gold," this banker remarked. "Spain and Scandinavia will not take our gold except at a discount of 5 to 7 per cent. If they can put that much of a discount on it, who' not 10 or 15 per cent.? Where is the process to end? The impossibility of restoring our rates to normal by gold shipments is apparent. Neutrals Want Commodities.

"It has been suggested that, if we cannot ship gold, we snould arrange to havo loans granted us in the neutral countries. That would take a number of drafts off the oxchango market, and relieve the pressure on exchange rates. But those credits would he repayable in gold, and again we are confronted with a difficulty. What tho neutrals want is goods, and before they will grant credits it may bo that they will demand guarantees that those credits shall bo repaid in commodities, rather than in goods. In other words, they will want the British blockade to be lifted to a certain extent— and our own embargo policy was intended to reinforce the blockade." As to tho causes for the present depreciation of the dollar abroad (or tho premium on neutral exchange in Now York, which is the same thing), opinion m for-ei-n exchange circles was practically unanimous. Those, causes are the depreciation at Stockholm, Copenhagen, Amsterdam, and Madrid of exchange onLondon, Paris, ani othor capitals of European belligerent countries. At the same time, the sterling rato in New York -has boon "pegged," or maintained, at a discount of only about 2 per cent, from parity whereas in neutral European centres ft 'is depreciated from 'J to 20 per cent. Under tnese conditions, what happens? A merchant in Christiania who has sold goods to England and drawn a draft on London to cover the shipment, finds that if he sells "his draft to a banker in his own city ho gets 12 per cent, less than its nominal value. If, however, ho sells it in New York, ho gets only 2 per cent, less than parity. So, through his banker, he arranges to sell his sterling draft in New York, which results in his having' a credit here. Then, in order to get his money home, he sells dollar drafts against it in Christiania, thus depressing tho rate for dollars there and forcing them down to a parity with sterl- °' / Rise in Neutral Exchange. Various other factors bave entered into tho riso in neutral exchanges at this centre. Where the premium on a. European exchange has beo.u greater in London than in New York, London bankers themselves have bought drafts here, m tho cheaper markot, .thus aiding the advance. Moreover, tho theory is advanced bv foreign exchange experts that, before tho American embargo on exports to north Europe becamo effective, neutrals bad bought exchango on New York at considerably less than, par, seeing tho chance of a epeculativo profat, should rates advance. However, when, our euibavgo- became offectivo, they did not advance, but fell further, so that a Swiss banker, having accumulated a balance hero by paying, say, 90 cents on the dollar, fouwl thai, ho could get but 85 cents on tho dollar for his American drafts. Every attempt to withdraw such balances would result in a further fall in the price of tho dollar. How these conditions can be remedied, foreign exchange bankers here i;ro at a loss to say. Gold cannot be shipped to the north of Europe, both because it is not wanted, arid because, if it got into German hands, it would actually strengthen tho German exchange, which has been falling heavily on neutral markets. Arrangement of erodits in bcandinavia, Holland, and other countries, would probably help, but it was pointed out to-day that that is a matter for Great Britain rather than tho United States to attend to. If it were not for tho depreciation in tho English and French rates on neutrals, it was said that our own exchange could bo righted with tho greatest ease.