Down, Down, Down Goes the Dollar

April 24, 1995

How far will the dollar drop against the yen? Only three months ago, eyes rolled when for the first time the greenback bought less than 100 yen. Since then its course has been down, down, down, dropping below 80 yen to the dollar momentarily in trading Wednesday. Some market speculators see nothing in sight to stop the free-fall other than fleeting upward blips.

Is this ground for concern? President Clinton and Treasury Secretary Robert Rubin talk piously about a strong dollar being good for the U.S. economy. But their actions speak otherwise. When the German and Japanese central banks cut their interest rates the other day, the Federal Reserve Board refused to raise U.S. rates in tandem and the dollar decline continued.

Washington apparently calculates:

First, that domestic considerations are paramount. With the economy slowing and Mr. Clinton anxious for a "soft landing" rather than a recession as 1996 elections approach, the pressure is on the Fed to avoid another interest rate boost.

Second, the more the dollar falls and the yen rises, the greater are the chances that U.S. goods will force their way into the Japanese market. Latest trade figures show the huge U.S. trade deficit with Japan narrowing for the fourth month in a row -- part of a welcome improvement globally.

For Michel Camdessus, director general of the International Monetary Fund, Washington's course has been so troubling he has gone public to scold the IMF's biggest contributor. "A country that is responsible for the reserve currency of the world has the responsibility for maintaining its stability and keeping it in line with fundamentals," he complained. Mr. Camdessus said he was not unduly concerned until recent dollar declines posed a danger to the world economy and threatened a burst of U.S. inflation that could lead later to drastic action.

Because the Federal Reserve under Alan Greenspan has been so successful in guiding the U.S. economy since the Clinton administration took power, we see no need for panic because of market gyrations or IMF admonitions. The United States is not as vulnerable to trade and currency developments as are Germany and Japan. It can therefore pay more attention to its internal economic destiny, and should do so within prudent limits -- none of which have been conclusively punctured.

The key thing is to keep cutting the federal deficit. Once this is done, the dollar again will reflect the underlying strength of the U.S. economy.

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