The Dollar Fights Back

A well-dressed man walked into a West German bank last week, drew a gun and told a cashier: "I want only Deutsche Marks. Don't give me any dollars, for heaven's sake." He made off with 54,000 marks.

Such are the depths of devaluation and disrepute to which the once almighty dollar has fallen. So far this year the German mark and the Swiss franc have appreciated about 35% against the dollar; the French franc has risen 25%. This is causing prices of many European exports to climb intolerably and threatening a number of Continental industries. To ease the situation, European monetary officials went on demanding that the U.S. Government intervene--buy up dollars on foreign money markets to keep the dollar from falling out of sight. What they got in return last week was something short of resolute intervention, but it had the desired effect.

First, U.S. officials at a meeting of central bankers in Basel endorsed the principle of intervention--apparently repudiating the tired U.S. position that the dollar's weakness is Europe's problem, not America's. At midweek the Federal Reserve agreed with foreign central bankers to increase by 50% (to $18 billion) the amount of foreign currency that the U.S. can borrow under a longstanding "swap" arrangement for use in buying up surplus dollars abroad. Finally, West German financial officials reported that there had been some limited official dollar buying--perhaps $100 million of it--by the U.S. and European governments. Result: the dollar rose in foreign money markets for three straight days before leveling off at week's end.

The U.S. actions seemed less a policy change than an expedient designed to convince money traders and multinational corporation treasurers that they can get burned trying to speculate against the dollar--especially with the U.S. Government willing to support it. The U.S. would also keep speculators guessing as to when and by how much it might intervene.

Because the dollar is undervalued, Washington still feels that market forces will ultimately cause it to rise. The West German government statistical office has put together a set of figures showing just how much the dollar is undervalued. The exchange rate is only 2.38 marks to the dollar, but a dollar in the U.S. buys the same amount of goods as 3.17 marks does in Germany. Similarly, the exchange rate for Swiss francs is 2.86, but the dollar's "real" value--or purchasing power--is equal to 3.90 Swiss francs. The rate for French francs is just over four to the dollar, but the real value of the dollar is about 4.23 francs.

Until the dollar's official rate rises again, American goods in theory should be irresistibly attractive on foreign markets, and some foreign goods should become increasingly expensive in the U.S. For example, a basic Volkswagen "Beetle" that sold for $1,899 in the U.S. two years ago now has a sticker price of $2,299; further increases can be expected. Thus the U.S. trade and payments balances should ultimately improve.

It is a nice scenario, but things may be a little late working out that way. True, U.S. trade figures have begun to strengthen, but the U.S. will have to import more and more fuel--at higher prices. The recent imposition of export controls on U.S. soybeans and 41 other commodities will take some of the nation's most salable items off world markets. At the same time, prospects for a dramatic increase in other exports are not encouraging. U.S.-manufactured goods face a labyrinth of tariff and nontariff barriers at many borders; a number of American firms are reluctant to divert goods from the red-hot home market; and not a few U.S. products are at present unsuitable for foreign markets. Most household appliances are designed for American voltages, and some U.S. television sets cannot receive signals from some foreign transmission systems.

The nation's overall payments balance is still deep in deficit (the shortfall in this year's first quarter was $1.2 billion). Some reasons: despite the dollar's drop, American tourists are still flocking to Europe, the U.S. still keeps 606,000 military personnel overseas, and U.S. businessmen are still moving capital abroad about as fast as they did last year.

U.S. officials recognize that until pressure on the dollar eases off, neither the "Nixon Round" of tariff negotiations that will open in Tokyo in September nor the ongoing international talks on long-range monetary reform are likely to succeed. Yet it is doubtful that last week's recovery of the dollar signals a permanent cure. As a high official of an international economic organization in Paris put it: "The dollar's future resembles a fever chart--many ups and downs, but no real change. You can describe the patient as still being critically ill."

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