Dollar Daze

By GEORGE J. CHURCH

The dive in the dollar had once been expected to dominate this week's summit meeting of the seven major industrial powers in Naples. But now Secretary of the Treasury Lloyd Bentsen insists there will be no "detailed discussion" -- and perhaps wisely. What, after all, could Bill Clinton say? That he is not to blame for the battering of the buck, sees little he can do about it, and is not sure he should even try? A plausible argument could be made for all those propositions, but it would not calm the currency markets.

Day after day the greenback has been hitting post-World War II lows against the Japanese yen. At one point last week the dollar would buy less than 98 yen, down about 2% since June 21 and 10% since February. The dollar has also fallen about 8% this year against the deutsche mark, to 1.59 DM last week. Those drops have contributed to a continuing erosion of stock and bond prices. The Dow Jones industrial average was 3647 Friday, down 8% from its Jan. 31 high, while the yield on 30-year U.S. Treasury bonds had risen to 7.6%, higher than when Clinton was inaugurated.

How come, when the U.S. economy is expanding steadily with little inflation? Some conservatives grumble about an international investors' vote of no confidence in Clinton's leadership. But most analysts stress other causes. German financiers cite a worldwide demand for investment capital to finance renewed economic growth. The U.S., they say, is losing out because investments in other countries yield a return roughly equal to what American securities pay, with less risk of currency-exchange losses. So fear of a further decline in the dollar chokes off the very investments that could prevent it.

More fundamentally, decades of U.S. trade deficits have sent hundreds of billions of dollars sloshing around the world, and the oversupply, like an oversupply of, say, wheat, drives down the price. In particular, the U.S. trade deficit with Japan creates a constant pressure against the dollar. Japanese companies regularly sell the dollars they earn trading with the U.S. for yen to pay off workers, stockholders and creditors in Japan. The pressure might be eased by a Tokyo government with the will and staying power to negotiate a trade deal that would reduce Japan's trade surplus with the U.S. -- but the bizarre coalition government cobbled together last week hardly qualifies.

Coordinated selling of yen and marks and buying of dollars by government central banks has twice failed to prop the dollar's price. The U.S. Federal Reserve might try raising interest rates again -- possibly this week -- to make American investments more attractive to foreigners. But most analysts doubt such a move would accomplish much unless it were synchronized with interest-rate cuts in Europe and Japan, which would not be easy to achieve. It could even be dangerous. The big worry about the dollar slide is that it will fan U.S. inflation by raising the price of imported goods and the American- made products that compete against them. But the U.S. imports more from Canada and Mexico than from Germany and Japan, and the American currency has actually risen against the Canadian dollar and the Mexican peso. A further rise in interest rates might hurt the U.S. economy, by making consumer purchases and business investments more costly to finance, much more than it would help by restraining import inflation.

Doing nothing has its dangers too. The drop could feed on itself until it got totally out of hand. One helpful factor is that the dollar is considered to be undervalued: it will not buy as much as an equivalent number of marks or yen. In a rational world the dollar would rise until the purchasing power of the various currencies was equalized. But waiting for rationality in currency markets is like waiting for the really big earthquake to hit California: it could come tomorrow, or in the next decade, or not in our lifetime.

With reporting by Bernard Baumohl/New York, Edward W. Desmond/Tokyo, Suneel Ratan/Washington and Bruce van Voorst/Bonn