Good news and bad news accompany weak dollar

Andrew Leckey

September 04, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

If you're having a hard time convincing your children of the value of a dollar these days, don't despair. Most of the world has lately been having difficulty making that very same determination.

Bouncing around a bit after plummeting to a 47-year low against the German mark, the U.S. dollar isn't expected to gain significant ground any time soon. It's still not cause for paranoia. The relationship between the mark and the dollar represents more of a German crisis than an American crisis, and there's little need for collective self-doubt about greenback weakness. Bad and good will come of it.

As to the bad, tales abound of American tourists in Europe paying $7 for film, $3.50 for Big Macs and $200 a night for tiny hotel rooms. At the same time, the average price of an import car sold in the United States has risen $652 this year, an indication foreign goods are getting rich for our blood.

Some point to uncertainty over the U.S. presidential election as one reason for the greenback's decline, which is a valid point. But the strongest reason is the difference in respective interest rates of Germany and the United States. German short-term rates are around 9.8 percent, American short-term rates 3.25 percent. No wonder the dollar, which experienced a crisis of being overvalued in the mid-1980s, has suffered a severe sell-off the 1990s.

Germany, which endured rampant inflation in its past, has no intention of experiencing it again as a result of its budget deficit tied to rebuilding East Germany. So its Bundesbank has boosted interest rates, letting the chips fall where they may. This first hurt European nations, and now the United States.

There are positives, such as U.S. exporters experiencing profit gains and opportunities to increase market share. U.S. businesses with operations in Europe harvest profits as they bring home income. Furthermore, some Americans are taking advantage of high German rates by investing in mutual funds that hold German bonds or short-term money-market instruments.

European exporters will continue to be squeezed badly. One possible negative in that for Americans is that our manufacturers may use rising foreign prices as an excuse to boost their own prices, thereby boosting our own inflation. A few pundits say the current scenario could change relatively soon.

"This will come to a head by November, not only in regard to the U.S. election, but [also] the German economy," predicts Robert Barbera, chief economist with Shearson Lehman Brothers.

"Economic data coming out of Germany is taking an increasingly somber tone, and, when the German economy breaks, there should be an opportunity for German rates to break."

That would help the dollar and most other world currencies. Other experts expect all this to take a bit longer.

"As [for] U.S. interest rates rising soon, prospects are slim to none and 'slim' just left town," says Marc Goloven, economist with New York's Chemical Bank. "While the chance of lower German interest rates is somewhat greater, Germany's concern over its inflation and rapid money-supply growth won't let it occur any time soon."

The dollar isn't dead in the water everywhere. It has become somewhat stronger vs. the Mexican peso, and Mexico is about to eclipse Japan as our second-largest trading partner.

It's also stronger than currency of most Latin American countries with high inflation and Eastern European nations.

Just don't try to throw those dollars around in most industrialized countries, particularly those that peg their rates to Germany. Today's traveler, while benefiting from lower air fares, has been taking it on the chin once he lands.

"The overseas traveler is best-served by taking a tour with the basic cost guaranteed in U.S. dollars, or by using prepayment plans for certain hotels, meals and activities," advises Bernice Rosmarin, vice president of the American Society of Travel Agents and special projects coordinator for Stratton Travel in Franklin Lakes, N.J.

"You can also prepay rental cars here in the U.S. before departure, while Eurail passes are a good idea for those travelers who don't want to drive."

Check the foreign exchange rate with your travel agent before departing, Ms. Rosmarin adds. Avoid expensive hotel restaurants, instead seeking out restaurants that post three-course meal prices in their front windows.

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