Try To Stop Me, If You Can

There it went again: up, up and away. As fidgety governments struggled with little success to halt the trend, the U.S. dollar took off last week on the sharpest rally since it surged to record heights against major currencies in 1985. The frenzied rise -- which brought the greenback's gain against the West German mark and the Japanese yen to 12.5% so far this year -- raised disturbing doubts about the ability of the U.S. and its major trading partners to keep exchange rates under control. "This is a runaway freight train," said Jay Goldinger, a Los Angeles-based trader. "Anyone who tries to stand in the way will be run over."

The rally surprised experts, most of whom had expected the dollar to drift lower this year. Their best explanation: a combination of high U.S. interest rates, which make the dollar attractive to foreign investors, and the political woes of West Germany and Japan. The Japanese have yet to pick a successor to Prime Minister Noboru Takeshita, who announced his resignation in April over a stock scandal; in West Germany, Chancellor Helmut Kohl's Christian Democrat Union has lost two important local elections this year. Moreover, even though the yield on such securities as ten-year U.S. Treasury bonds has slipped from 9.2% earlier this month to 8.8% last week, it remains higher than the return on comparable securities abroad.

Such considerations helped spur the rally last week even as governments | dumped billions of dollars onto foreign exchange markets in an effort to push the U.S. currency down. Traders continued to snap up dollars after Washington reported that, with exports up 7.4%, the U.S. trade deficit narrowed to $8.86 billion in March, down from $9.82 billion the previous month. A day later investors shrugged off the news that the Consumer Price Index rose a sharp 0.7% in April because the gain reflected a record 11.4% surge in gasoline prices that is not expected to recur.

At week's end traders pushed the dollar to a 2 1/2-year high of 1.977 West German marks. That pierced the 1.90-mark ceiling that the U.S. and its trading partners reportedly agreed to in a 1987 accord. In Tokyo the dollar's high reached 139.88 yen, its loftiest level in 16 months and just below the 140-yen ceiling that the allies set. The U.S. and its partners are determined to do what they can to slam on the brakes -- but whether their efforts would slow down the runaway dollar remained an open question.

CHART: NOT AVAILABLE

CREDIT: TIME Chart by Cynthia Davis

CAPTION: RUNAWAY TRAIN