Why the Dollar Is Dropping

Japan was not a good place for Americans to be last week, and Europe was not much better. The bruised and battered buck was staggering through another glassy-eyed performance of its Incredible Shrinking Act; and when the curtain dropped at week's end, the star performer looked more frazzled and anemic than ever.

This time, the worst drubbing came in Japan, where the dollar opened the week at 200.1 yen and was instantly engulfed in a tidal wave of selling hysteria. Though the Bank of Japan spent a remarkable $400 million in official reserves during the first 25 minutes of trading on Monday in an effort to halt the collapse, the once mighty greenback still crashed through the psychologically important 200-yen barrier and kept plunging all week. At its Friday close on the Tokyo Exchange, a dollar would buy only 192.10 yen, a depreciation of nearly 5% in a week, and an overall decline of more than 18% since January.

In Europe, where the dollar's gyrations last winter and spring cost the U.S. Treasury some $3 billion in support operations, the greenback was already so grossly undervalued against the West German mark that the exchange rate remained relatively stable at about 2.04 to the dollar. But the value of the Swiss franc rose to an alltime high of 1.75, and the price of gold surged to a record $201 an ounce on frantic trading in both London and Zurich.

For Americans living or traveling abroad, the dollar's week-long oscillations added yet more irritation to the once enjoyable experience of spending U.S. dollars overseas. At present exchange rates, a U.S. Army lieut. colonel stationed in Japan earns less than senior Japanese guards ($25,900) employed at the base near Tokyo. In Paris, where the French franc hit a three-year high against the dollar and a Coca-Cola costs $1.25, California Tourist William Warrell glumly observed: "I don't see how people can travel anymore. I really don't."

Many of the explanations for the dollar's dive were depressingly familiar: the continuing weakness of the nation's trade balance, lack of progress in Congress on an energy bill, persistent rumors that petroleum-exporting nations might be planning to stop pricing their oil in dollars and switch to a basket of stronger currencies. To that litany, businessmen, bankers and money traders added a couple of new elements: dismay at the lack of any sort of dollar-strengthening scheme to emerge from the economic summit in Bonn of the previous week, and a feeling that European leaders are making unexpected progress on setting up a unified Common Market currency that could, in effect, reduce the dollar's importance in international trading and depress its value still more.

The explanations did not clarify matters very much. The nation's trade balance is indeed appallingly bad, with imports exceeding exports by some $16.4 billion since January, a nearly 50% in crease from the same period of last year. Yet last week the Commerce Department released June's trade figures and, though the monthly deficit was still $1.6 billion, it was the best one-month total in more than a year and showed a $600 million improvement over May. To blame the dollar's dilemma on the stymied energy bill also seemed a reach. It is undoubtedly a disgrace that the world's largest industrial nation and principal importer of oil has no comprehensive program of energy development and conservation. Nevertheless even without such a program, oil imports so far this year have dropped by 13% as a result of conservation efforts and increasing domestic production from the Alaskan North Slope.

What the explanations really illustrate is a continuing erosion of worldwide confidence in the U.S.'s ability to manage its economy. In just about every area that matters--inflation, productivity, investment, economic growth--the performance has been deteriorating, and last week provided still further evidence. Almost from the moment that inflation once again hit double digits in April, the Administration has been blaming the rise on food prices and promising that the climb would soon abate. Some food prices have begun to subside, though the Labor Department's June inflation rate showed that for the third month in a row prices rose at an annual rate of 11.4%. Productivity figures were also released, and they revealed an all-but-invisible increase of 1/10% from April through June. Even though the Administration still forecasts about a 3.5% to 4% increase in the U.S.'s G.N.P. over the next twelve months, the 24-nation Organization of Economic Cooperation and Development last week warned that 3% growth is a much more likely figure.

At the root of these woes is inflation, while the collapsing dollar is pushing up prices even more. Not only do companies have to pay higher prices for foreign-made heavy machinery, engineering equipment and other high technology goods that have now replaced oil as the largest single category in the nation's import bill, but individual consumers are also being hurt. In the past year, the price of Volkswagen Rabbits has climbed 12.6%, and Japanese Toyotas are up 13% this year. Rising prices for imports likewise give domestic manufacturers an excuse to raise their own prices. This in turn sends more money pouring abroad, depressing the dollar's value on foreign money markets. Says Chase Manhattan Bank Economist Sykes Wilford: "If people look down the road a year and see U.S. inflation at 10%, they're going to get out of dollars."

Washington's reaction to last week's sell-off was ho hum, with officials arguing that it was not as bad as the confusion that gripped international money markets between October and April. Said one high U.S. economic policymaker: "The right yen-dollar relationship has never been found"; and he predicted that the dollar could go to 180 yen before Japanese exports would be adversely affected.

Under Secretary of the Treasury Anthony Solomon managed to be upbeat, suggesting that fewer dollars would be pouring overseas in the future, because the weakening economy is now starting to drag down the U.S. growth rate to a level closer to that of the rest of the world. The reasoning is in sharp contrast to the White House's yearlong drive to persuade West Germany and Japan to pump up their economies rather than to have the U.S. rely on a slowing of its own; and it is typical of the wavering signals that the Administration has been sending out all along. The White House already projects that U.S. inflation will average at least 7.2% this year, nearly three times as much as in West Germany. Moreover, a growth rate of about 3% to 3.5% for the U.S. would be less than half of the 7% or more that Japan hopes for this year. To bring the U.S. into line with those two countries, productivity must not only be lifted, but inflation has to be slowed. More is at stake than just the value of the dollar. As one leading international economist observed: "How can the U.S. be a world leader when it is tarred and feathered every day in the money markets?" qed

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