After months of encouraging the dollar to fall against the...

SUNDAY OUTLOOK

May 15, 1994|By John E. Woodruff

After months of encouraging the dollar to fall against the yen, the Clinton administration approved this month when the Federal Reserve joined an international intervention to hold the line at 100 yen to the dollar. Would American businesses or the U.S. economy be affected if the dollar were worth less than 100 yen? Just how do exchange rates affect U.S. interests?

Paul W. Boltz

Chief economist,

T. Rowe Price Associates Inc.

The question came to a head as the dollar approached 100 yen because that level has symbolic importance.

Ronald Reagan attacked Jimmy Carter because the dollar was so weak, and I don't know if people in the Clinton administration were looking over their shoulders at that.

The dollar should buy a lot more today than it does in Japan. But it was being affected by short-term capital flows and political news. Japanese banks have serious problems, and some may be selling dollar assets to shore up positions at home.

So this month's action had some effect because fundamentals were on its side, though in general I have little faith in currency intervention.

Fundamentals say the dollar should strengthen against the yen now but that the long-term trend is down.

A falling dollar should help the U.S. cut its trade deficit with Japan, and the deficit's persistence in the face of a falling dollar -- may be a factor currency traders were looking at. But it is getting hard for Japanese exporters to sell in the U.S., and the rising yen is one reason Ford and General Motors recently spoke of raising car prices.

Inflation thus is one danger of too fast a fall, and of course the government also has to pay higher interest rates to get foreigners to buy Treasury bonds.

Donald A. Palumbo

Vice President and Treasurer,McCormick & Co.

We have many operating facilities overseas, and a weakening dollar shows up as an increase in the dollar value of their profits and assets.

We will occasionally use derivatives to protect against currency exposures, but always in relation to an underlying transaction. For example, if we know our British subsidiary is sending us a substantial dividend in pounds sterling, we might enter exchange markets to protect ourselves until that is completed.

Most spices trade in dollars on world markets, so we don't have much exposure to, say, Rupees or Cruzeiros on the buying side. Still, orderly currency movements are better for world trade, and that makes them better also for McCormick.

Charles Pearson

Director of International

Economics,

Nitze School of Advanced International Studies

The 100-yen rate is symbolic. From an economic standpoint, 101 yen or 100 or 99 are all the same.

About the time the Japan-U.S. trade talks collapsed, the implicit though not explicit Clinton administration policy became one of using the exchange rate to pressure Japan to help reduce the bilateral trade deficit. About 10 days ago, the administration got cold feet, seeing several effects they had not anticipated.

A rising yen was contributing to U.S. inflation and forcing bond rates up as foreign investors saw returns shrink with the lower dollar. The administration also belatedly recognized that a very strong yen condemns Japan to stagnation, which keeps Japan from importing U.S. goods.

Without the administration's implicit policy, the dollar would not have dropped so precipitously.

Somerset Waters

Assistant Treasurer,Black & Decker Inc.

We have a number of subsidiaries in Japan and have to translate the balance sheets to U.S. dollars. We have about $250 million in exposure to the yen, and as the yen appreciates we see a real translation gain.

We have a very conservative foreign exchange policy, which is reviewed by our board of directors, and these gains or losses are always hedged. One hedge is about $150 million in yen borrowings, which offsets any gains or losses.

We recently established a power tool marketing operation in Japan, and the appreciating yen will make that much more viable by making it easier to export to Japan.

We also have a significant competitor named Makita that imports many tools here from Japan, and a stronger yen makes it harder for them to export to the U.S. They are expanding their U.S. manufacturing to source more in the U.S.

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