Dollar sags with traders' confidence in U.S. ability to ease trade deficit

June 26, 1994|By Cox News Service

WASHINGTON -- The old chestnut "as sound as a dollar" took a battering last week, and so did the greenback, falling to a postwar low against the Japanese yen and a near-low against the German mark.

The dollar had slumped so badly by Friday that the U.S. Federal Reserve and other central banks around the world sounded their equivalent of an alarm bell, buying billions of dollars in an effort to prop up the sagging American currency.

With U.S. economic performance topping that of its major global rivals, how did the dollar become such a basket case that it

required emergency treatment by week's end?

Many things play into the decline, ranging from the enduring U.S. trade imbalance to a more general loss of faith in U.S. prestige and power abroad.

L The key to the dollar's erosion, however, is interest rates.

Currency traders believe U.S. rates are out of balance with the country's economic performance in the world. Until U.S. rates rise, analysts say, the dollar will stay in the cellar, despite the best efforts of central bankers.

"A policy response from the U.S., in the form of higher interest rates, is necessary" to stem the dollar's slide, Tokyo-based analyst Rod Smyth of the London investment house Baring Securities wrote Friday.

"We are dealing with . . . a general loss of confidence in the U.S. currency," Mr. Smyth wrote.

Far from reversing that loss, Friday's heavy dollar buying by the central banks simply underscored to investors the dire straits of the currency. Such prop-up buying is regarded as a Band-Aid approach whose benefits, if any, will dissipate as quickly as the buying ends.

Indeed, the Bank of Japan alone has spent nearly $40 billion over the past year buying dollars, according to the New York investment firm Merrill Lynch & Co. Despite those measures, the dollar has slipped nearly 20 percent against the yen since last summer.

"The currency markets view these interventions as essentially futile," said corporate economist Kevin Sigrist of the Minneapolis bank Norwest Corp. Central bank action may cushion a currency's fall, he said, but in the long run, "They can't beat the fundamentals."

The current reality is that, as U.S. economic performance has tapered off to what many economists regard as a sustainable pace of just below 3 percent annual growth, U.S. investors have gone hunting overseas for higher returns.

It's hard to find an American investor -- from parents saving for their children's college tuition to the giant institutional financiers -- who hasn't put some money abroad.

Mutual funds, for instance, targeting such high-growth regions as Southeast Asia, China and Latin America, have attracted billions of U.S. investment dollars in recent months, as investors observe economies growing at rates ranging from 7 percent to 13 percent a year.

Money market managers also are looking overseas. Germany, for instance, is offering interest rates of nearly half a percentage point above those paid here, so billions of dollars have flowed to Frankfurt.

Americans, meanwhile, continue to buy more from the world marketplace than they sell there.

In the first four months of this year, the United States imported $32.7 billion worth of foreign goods and services more than it exported, the Commerce Department reported last week. That's whopping 57 percent increase in the trade surplus over the comparable period a year ago.

As more and more dollars are shipped abroad to invest in other countries and to buy their products, the value of the dollar relative to many foreign currencies declines.

That, in effect, makes Americans a bit poorer in the global marketplace, because the weaker the dollar, the more dollars it takes for Americans to buy foreign-produced goods and services.

That isn't all bad for the American economy.

As foreign-produced goods and services become more expensive, American products become more attractive, stimulating jobs and economic activity in the United States.

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