Get ready to pay more for imports

March 09, 1995|By Jay Hancock | Jay Hancock,Sun Staff Writer

In Berlin, a cup of coffee that cost Americans $1.70 a year ago now goes for an even more expensive $2.15, thanks to the German mark's steep climb against the dollar.

But even if you're not planning a stroll down the Kurfurstendamm anytime soon, the greenback's problems may hurt your wallet.

Japanese VCRs, German cars, Swiss chocolate and other imports will become costlier. Inflation could heat up as a result.

The Federal Reserve might raise short-term interest rates yet again to fight inflation and make the dollar more desirable, and some fear that higher rates could tip the slowing economy into recession.

"Never in my lifetime have you seen such a severe depreciation of our currency relative to others," said Richard Paget, managing director at Baltimore investment house Alex. Brown & Sons Inc. "What it does is lower our standard of living globally."

Mr. Paget and other analysts interviewed yesterday don't expect the Fed to raise rates yet. Inflation hasn't been a threat for years, and an apparent cooling-off in the U.S. economy could counteract price pressures.

Economists also point out that currencies of two major U.S. trading partners -- Canada and Mexico -- have fallen against the dollar in recent weeks, not risen. That makes Canadian and Mexican goods less expensive.

But the possibility of a rate boost by Fed Chairman Alan Greenspan will increase if the dollar falls father, analysts said.

"I think he will not tighten unless he has absolutely no alternative," said Charles W. McMillion, president of MBG Information Services, a Washington economic analysis firm. "If he does tighten, it's not a good sign."

Silver linings

A cheap dollar isn't all bad for the nation's economy. It makes U.S. products less expensive overseas, and American manufacturers are pleased with the prospect of increased exports. Economic development officials also believe the latest decline could spur European and Japanese companies to build more U.S. plants.

"The dollar is getting to a level where our customer base has an exceptional level of competitiveness against our major trading partners," said Bob Wendt, manager of economic studies for Bethlehem Steel Corp., which has a large plant at Sparrows Point in Baltimore County. "This should help all U.S. manufacturing."

Bethlehem exported little steel directly last year -- less than 5 percent. But its client carmakers, can makers and building manufacturers did.

With the dollar's latest drop, the average manufacturing wage in Germany, including benefits, is now $32.60 an hour, Mr. Wendt said. In Japan it's $25.10. The United States, by contrast, has an average hourly manufacturing wage of $17.60.

"I don't know how their manufacturing sectors can basically survive over there," he said.

Causes of the dollar's decline are nothing new. They've just become more severe.

The United States has flooded the world with dollars and dollar-denominated investments. Like any other item, when the supply goes up, the price goes down.

U.S. borrowings overseas are enormous -- thanks to perennial federal budget deficits and huge trade deficits in which we buy far more goods from foreign producers than they buy from us.

Financial analysts believe that the currency crisis will help persuade Congress to approve tax incentives that would boost Americans' savings rate, so that the federal government won't have to rely so heavily on foreign investors.

The dollar has been falling against the Japanese yen, German mark and other currencies for years. Not long ago, a dollar could buy more than 140 yen. Now it's hovering around the level of 90 yen, down from 101 in January.

Trade deficit sparks decline

The latest decline was sparked in part by the United States' huge trade deficit last year. Some had suggested that poor U.S. trade performance was caused by European recession, which hurt demand for U.S.-made goods. But European economies perked up last year -- and the trade deficit was still big.

Political developments hurt, too. Congress' failure to pass a balanced-budget amendment last week cast doubts on the country's resolve to stop living beyond its means, economists said. The United States' bailout plan for Mexico has raised fears of U.S. exposure to fiscal problems in Latin America.

"Its just a lack of confidence," said Mickey Levy, chief financial economist for NationsBanc Capital Markets Inc.

"The rest of the world has lost its appetite for dollars due to a lack of credibility in the government. That's an issue that cannot be resolved by the Federal Reserve," he said.

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