How would a strong dollar affect local, national economies in 1997?

The Outlook

February 02, 1997|By Kevin L. McQuaid

WITH THE continued strength of the U.S economy, the dollar recently hit a four-year high relative to other major world currencies, particularly the Japanese yen.

Although most analysts view a strong U.S. dollar as a positive for the economy, it has a tremendous effect on imports and exports, the nation's trade deficit, foreign tourism and manufacturing and could influence the prices of a variety of goods -- including new foreign automobiles -- bought by consumers. And because a rising dollar helps hold down the cost of imports -- and hence inflation -- it could help persuade the Federal Reserve to hold interest rates steady. Most analysts are expecting the Fed to raise interest rates slightly this year, as part of an effort to stem a potential rise in inflation.

The dollar's rise in value will likely have an impact in Maryland, too, because the port of Baltimore serves as a major channel for imports and exports. If a rise in the dollar's value continues, volume at the port could be affected by a decrease in exports and a corresponding gain in imports.

If the dollar remains strong throughout 1997, what are the implications for the local and national economies?

Penelope W. Menzies

Executive director, Maryland World Trade Center Institute, Baltimore

A stronger dollar makes U.S. goods more expensive abroad and conversely makes for a good market for importers.

With a strong dollar, I think you'll see a slowdown in U.S. factory production of goods specifically targeted for export, which, if it continues, could have a slight effect on employment figures. A strong dollar is great for our trading partners, and with the economic situations currently facing Japan and much of Europe, they can use the help.

We have many more companies focusing on exporting than importing in Maryland, though. For instance, according to our records, there are roughly 605 firms engaged in exporting, 287 who do a combination of exporting and importing, and only 87 that exclusively focus on importing. The difference is is that most of the importing is done by smaller firms, so this trend should be really good for them, increasing their level of hiring.

C. Fred Bergsten

Director, Institute for International Economics, Washington

In the short run, a strong dollar often produces tangible benefits, because it dampens the pressure to raise interest rates. But longer term, a healthy dollar can hurt our trade policy, because it can lead to a substantial increase in our trade deficit.

Historically, a 1 percent increase in the average monetary exchange rate equals a $10 billion deterioration in our trade balance, so there are real ramifications from the dollar's increase.

But this is all part of a rebound that began about two years ago, and the result is the dollar is probably 10 percent overvalued at this point, in my opinion.

The potential problem is, if the economy softens and unemployment rises, as is likely, an overpriced dollar could impact some serious economic issues going forward.

If that occurs, it could signal a return to the mid-1980s, the last time the dollar became overvalued. When that happened, it helped create the forces which eventually led us into prolonged recession. The dollar's gain wasn't the only factor, but it contributed.

Brian McCarthy

Market analyst, Ruesch International, Washington

Obviously a rising dollar is going to hurt our export sector and boost imports, but it may also cause -- or at least contribute to -- a slowdown in the U.S. economy, which many analysts have been predicting for some time.

The strong dollar also may cause the Fed to hold off on an interest rate hike, which many have also been predicting would happen in the near future.

I think the big test for the dollar will come in April, when Japan is supposed to implement a new sales tax. If that goes through, that could mean even further gains for the dollar.

Even though Japan isn't our largest trading partner, and its economy has been sluggish of late, Japan's economic performance has a tremendous effect on our currency and economy.

If the dollar remains at its current level, or increases, it would obviously have implications for our trade deficit. On a practical level, a strong dollar should make foreign automobiles cheaper, assuming that dealers pass the savings onto consumers. In turn, lower prices there could pressure domestic auto dealers to decrease their prices, in order to keep pace.

And from a securities perspective, the U.S. bond market usually is quite pleased with the rise of the dollar, because traditionally that has signaled that inflation will be kept in check.

That's not the only thing they look at, of course, but it's certainly one of the things they consider when analyzing the economy as a whole and in attempting to determine future projections of economic growth.

Pub Date: 2/02/97

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