Greenbacks In the Black

The American tourist cashing his traveler's check at Tokyo's Hotel Okura got a bundle of good news. Each of his dollars bought 280 yen, 15 more than the going rate just two weeks before. "The difference isn't much," he smiled, "but suddenly I feel a hell of a lot better. The good old U.S. dollar is getting back to where it should be--the world's best money."

If not the world's best, the dollar surely is the world's most revivified currency. Devaluation and floating the dollar against other currencies shaved 10.5% off its worldwide buying power between February and July. (An earlier devaluation, in 1971, had trimmed it by 3%.) By last week, though, the dollar had rapidly reduced its 10.5% loss to 6.2% (see chart). Many bankers believe that the dollar is still undervalued.

U.S. money is strengthening because the balance of trade has shifted dramatically from a deficit of $6.9 billion last year to a surplus of $800 million for the third quarter of this year. The balance of payments, which includes loans, investments and items like tourist spending, as well as trade, has moved from a $10.3 billion deficit last year to a surplus of $2.1 billion in the third quarter of this year, the Commerce Department reported last week. The devaluations have made U.S. goods less expensive and more competitive in world markets. The commodities boom, which has brought record exports of soybeans, wheat and corn this year, has been another major factor. Meanwhile, prices of foreign goods are rising because the rate of inflation is averaging 8.9% in Western Europe and 14.6% in Japan, compared with "only" 7.4% in the U.S.

The oil crisis has also brought on a sizable rise in the dollar's value because the U.S. depends much less on the Arabs' oil than the Europeans and Japanese do. As oil becomes scarcer and costlier, their industries stand to be hit painfully, and they will have to spend proportionately more than the U.S. for imported petroleum. These factors will damage their payments balances and weaken their currencies. As foreign currencies decline, the dollar should become relatively stronger. Alan Murray, a vice president of New York's First National City Bank, predicts that the dollar will float up another 10% next year.

In addition, the Federal Reserve Board and the central banks of six European nations took a step last week that reflected growing confidence in the dollar. The bankers announced that they will consider themselves free to sell gold on the open market at any price they can get. Under the old "two-tier" system, in effect since 1968, they were allowed to sell their gold only to other central banks at the "official" price, now $42.22 an ounce. Meanwhile, prices on the free market this year soared to more than $125, as many speculators sold dollars and other currencies in order to buy gold. The bankers had considered scrapping the obsolete two-tier system for months, but hesitated, fearing that to do so would cause unwarranted confusion in a market upset by the dollar's unpredictability. With the dollar resurgent, they felt free to move.

After last week's change, speculators can no longer be sure that some government will not dump large reserves of gold on the free market and knock down the price. Indeed, following the announcement, the free market price of gold dropped by $6.90, to $90 an ounce.

This file is automatically generated by a robot program, so reader's discretion is required.