In the first three quarters of 1987, there was little evidence of any substantial correction in current account imbalances between the three major industrial countries in dollar terms, despite improvements in volume trends in response to exchange rate adjustments. Capital account flows were increasingly concentrated among the major industrial countries, and were characterised by increased volatility of private capital flows, associated with fluctuations in exchange and interest rates and periods of substantial official exchange market intervention.
In October, market reactions to poor US trade figures triggered heavy falls in equity prices on world markets and a further sharp fall in the dollar. Under the influence of the stock market crash and the ensuing uncertainty, activity in the international capital markets was sharply lower in the fourth quarter. Issues of equity-related bonds, in particular, were reduced to very low levels, while increased tiering of rates and greater emphasis on credit quality were apparent in other market sectors. Conditions in the foreign exchange markets were at times highly volatile, influenced by perceptions of progress towards reducing the US fiscal deficit. Between end-September and end-December, the dollar fell by 17,1/4% against the yen and 14,5/8% against the deutschemark, and by 11,3/8% in effective terms.
International financial developments