Decline of the dollar won't last forever


April 16, 1995|By Kim Clark

When currencies fall, governments often use two simple tools to prop them up: They increase demand, and thus their currency's prices, by buying their currency in foreign markets. And they lure in other buyers by raising interest rates, which makes investments in their country more profitable.

The U.S. has done both since the beginning of the year, but the dollar still has fallen 17 percent against the yen and an average of about 8 percent against most of its major trading partners.

Are such interventions -- which can be quite costly -- worthwhile? If not, what should the U.S. government be doing?

Lyle Gramley

Economist, Mortgage Bankers Association

Our dollar weakness stems principally from a trade and federal budget deficit. When you have a federal deficit, it crowds out private investment. If we're going to cure our dollar problem, the only really fundamental way to get the job done is cut the deficit.

Everybody would agree that exchange rate intervention can't really affect the value of one's currency. At best, what you hope to do with intervention is make speculators a little wary.

I don't think the man on the street should lose any sleep over the falling dollar. But Congress should recognize that the financial markets are telling us in yet another way that it isn't appropriate ,, to have large budget deficits.

Lemma W. Senbet

Wm. E. Mayer Professor of Finance University of Maryland School of Business

I don't think people should be alarmed about this. If you look at the decline of the dollar in terms of the combined currencies of all trading partners, it is not that much -- only 3 per cent since January. Against Mexico and Canada, two of our biggest trading partners, the dollar has actually gone up.

The Federal Reserve is also keeping a very good lid on inflation, so this will not be that inflationary. And what we're learning from the stock market [is] things are not that bad. In fact, they are at record levels. If the market felt there was some kind of global recession down the line, it would not react that way.

Speculators may drive the value of the dollar down even more, especially if they feel there will be no credible intervention. That's where intervention plays a role. But it has to be coordinated.

Budget cuts? I don't see any direct linkage between budget deficits and the decline in the dollar. Being a net debtor is not necessarily bad. One of the reasons we have remained such a net borrower is that people have a lot of faith in this country.

Peter Askew

Executive Vice President, Rowe Price Fleming International division of T. Rowe Price, London

The supply of dollars globally exceeds the demand. When that happens the price of a currency falls. Now, investors are diversifying their reserves to include yens and Deutschmarks. U.S. pension funds are doing it. They are not deliberately trying to drive the dollar down, but they are trying to be prudent and diversify their assets.

There has been a focus, quite rightly, on currencies whose governments have not had the discipline or will power to deal with structural deficits.

The dollar's fall has been appropriate. For the currencies of Japan and Germany to appreciate is appropriate. The pace is perhaps sometimes inappropriate. There is a bandwagon effect.

Interest rate moves can have an impact over the short term, but they can last for only a short while. And there's no point killing your own economy just to preserve a higher currency.

To really increase the value of the dollar, I would seek some long-term measures to increase savings. A move to eradicate the deficit would inspire confidence."

Steven Hanke

Professor of Applied Economics Johns Hopkins University

L I wouldn't focus on the dollar because it is just a symptom.

Since the Bretton Woods Treaty, currencies are not backed by any commodities. Their value is determined purely by speculation. That speculation is driven in large part by investors' confidence in various central banks and countries.

The short-term interventions are more or less irrelevant. Countries usually lose their shirts on an intervention. The only thing that will change the course of the currency is to change policies, and the confidence people have in the central bank.

The Clinton Administration appears not to care where the dollar is, and may be quietly using it as a trade weapon. . . . The international view is just that we have a weak administration that wants the dollar weak.

There are only two things that will get the dollar moving upward: If we started to actually cut government spending as a portion of gross domestic product and if the Federal Reserve maintained a rather tight monetary policy.

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