Heady Days for the Dollar

By Charles Alexander

The payoff and the perils of a strong currency

The economic turn-around promised by Ronald Reagan is still dim and distant, but at least one stunning shift in U.S. financial fortunes has already unfolded: the rebound of the dollar. Since January, the American currency has risen by 14% against the Japanese yen, 27% against the West German mark and 33% against the Italian lira.

The spectacular surge in the value of American money is an abrupt reversal of a decade-long, disorderly slide that began in August 1971, when President Nixon severed the dollar's traditional link to gold. In the years that followed, relentless U.S. inflation and mounting trade deficits sent the dollar crashing on world money exchanges. In 1978 and again in 1979, the dollar plunged so precipitously that the U.S. Treasury had to spend billions propping up its value. But nothing worked for long. A dollar that bought 3.5 West German marks in 1971 was worth only 1.7 marks at the end of 1979.

The dollar's condition first started to improve while Jimmy Carter was still in office. High U.S. interest rates in 1980 began to entice foreigners to convert their money into dollars for investment in America, thus driving up the dollar's exchange rate. President Reagan early this year quickly proclaimed his commitment to a tight monetary policy, and the dollar's worth continued to climb. As Poland smoldered, the Middle East flared and the French voted in a Socialist government, jittery money traders and investors looked to the U.S. as a bastion of political stability. The dollar in recent weeks has reached a four-year high against the pound, a five-year peak against the mark and postwar records against the French franc and Italian lira.

The dollar's swift ascent, however, has been almost as unsettling as its previous weakness. American businessmen say that the robust currency has made their products too expensive abroad, and European leaders blame U.S. interest rates and the strong dollar for prolonging Europe's recession and fueling inflation.

Up until now, the dollar's strength has had a mostly positive impact on the ailing U.S. economy. Since last year the inflation rate has fallen from 12.4% to under 9%. Economists believe that the dollar's surge may have caused as much as half of that decline. Says Charles Schultze, who was President Carter's chief economic adviser: "The dollar's appreciation is undoubtedly putting downward pressure on inflation in the U.S."

As a result, consumers are finding bargains on imports. The price of an 18th century-style Italian-made end table at Bloomingdale's in New York City, for example, has dropped from $200 to $179 since February. At Ernie's Liquors in San Francisco, the cost of a bottle of Jadot Beaujolais wine has dipped nearly 30% to $4.99 in the past year. American Motors this summer has offered a 10% discount off the $7,398 sticker price of the Renault R-181 that it imports from France. Retail prices of Japanese electronic goods are expected to fall soon.

But while a strong dollar helps fight inflation in the U.S., it can push up prices in countries that are heavily dependent on imported oil. World petroleum prices are fixed in dollars, and so when the American currency is strong, foreigners must spend more of their own money to pay for the same amount of oil. As a result, the effective price of imported crude for Japan and Western European nations has exploded by as much as 33% this year.

Those higher oil costs ripple through economies and raise the prices of almost everything. A new report from the Organization for Economic Cooperation and Development predicts that by next year the dollar's rise will add two percentage points to the average European inflation rate, which now stands at about 13%. The report also noted that the dollar dilemma will delay Europe's recovery from recession for at least six more months.

In the long run, however, some economists believe that the strong dollar could be Europe's salvation instead of its scourge. Export-oriented countries like West Germany can now offer their products much more cheaply in the U.S. market and boost sales. Concludes a study by the Chase Econometrics consulting firm: "Europe is in the early stages of a classical export-led recovery, in which lower currency values lead to higher, not lower, growth. As exports grow, so do industrial output and employment."

But the same forces that favor European exporters could ultimately hurt American businessmen. Warns C. Fred Bergsten, Assistant Treasury Secretary under President Carter: "This enormous appreciation of the dollar has badly damaged the competitive position of American products in world trade." Harvard Economist Otto Eckstein, who is chairman of the Data Resources consulting firm, predicts that U.S. exports, which grew by 15.2% in 1979 and 9.6% in 1980, will decline this year by 1.3%.

U.S. exporters, big and small, are already feeling the pinch. St. Louis-based Monsanto Co., which racked up more than $1 billion in foreign sales in 1980, reports a 15% decline so far this year in its overseas shipments of chemicals and textile fibers. Masco Corp. of Taylor, Mich., with export earnings of $67 million last year, fears that its overseas sales of plumbing and oil industry equipment may fall as much as 10%-in coming months. Says Miran Sarkissian, the firm's director of international development: "Customers are balking. They have postponed orders." Earlier this month V.J. Electronics Inc., a small Los Angeles firm, was preparing a $20,000 shipment of amplifiers for the Margrit F. Linn Co. of Frankenforst, West Germany. Three days before the goods were scheduled to go out, V.J. suddenly received a cable from the German company canceling the whole order "because of the increased value of the dollar." Says Mark Wilkinson, V.J.'s marketing director: "We've dealt with them for a long time and we know them. It's discouraging and it kinda hurts."

The strong dollar puts pressure not only on U.S. exporters, but also on all American businesses that face competition from foreign imports. The U.S. steel industry, for example, is already hard hit. Since January steel shipments from West Germany, Japan and other competitors have jumped 45%. Foreign companies have now captured 17.5% of the American steel market. .Other industries expected to be hurt by rising imports include autos, apparel, machine tools and consumer electronics. Former Treasury Official Bergsten fears that unless the dollar weakens, up to 1 million Americans will lose their jobs.

Many economists are starting to believe that the dollar has become overvalued and will soon begin to slip. Rimmer de Vries, an international monetary expert at the Morgan Guaranty Trust Co., predicts that the current account, which measures the net international flow of goods and services to and from the U.S., will swing from a $10 billion surplus this year to a $5 billion deficit in 1982. That deficit will in turn drive down the value of the dollar, perhaps by as much as 10%.

Few moneymen, however, predict that the dollar will fall back to the depths reached in late 1979. International experts generally believe that the U.S. is finally confronting its inflation problems, and they are betting that this will mean a stronger dollar in the future. Says Joop van Kessel, an economist at the Amsterdam-Rotterdam Bank: "There is a general feeling that things are working for the best in the U.S. That confidence has a lot to do with Reagan's cowboy image and strong personality." Even European government officials, who have been battling to bolster their currencies, give Reagan a grudging nod. Italian Treasury Minister Beniamino Andreatta attributes the dollar's rise to the "coherence and very strong new credibility of the American government." But that credibility could crumble quickly at the first signs of an easing in the war on inflation.

While there are both benefits and drawbacks in a strong currency, the overall effects on the U.S. economy are positive. A weak dollar in the late 1970s permitted American companies to grow lax because they rarely had to worry about being undersold by foreign competitors. Now a strong dollar will force U.S. firms to hold down prices and boost productivity both at home and abroad in order to be leaner, tougher and more competitive. William MacKenzie is export manager for a small Los Angeles company that sells household appliances and building supplies to Europe, the Far East and Latin America. Says he: "It's kind of tough to see business go out the door because of this high dollar. Yet at the same time, I support Reagan's policies. I think he's right. So I'll just tighten my belt and work harder."

--By Charles Alexander.

Reported by David Beckwith/Washington and Bernard Baumohl/New York

With reporting by David Beckwith, Bernard Baumohl

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