The Dollar As King Currency

As television cameras whirred and photographers snapped away last week, a clerk at the Paris currency exchange wrote the historic numbers on the chalkboard next to the words United States: 10.0230. In Milan, another clerk scribbled in the new price for the dollar: 2003.40 lire. The U.S. dollar, which only five years ago was the world’s weakest major currency, had just passed two important milestones: 10 francs and 2,000 lire to the dollar. In New York, London, Paris, Tokyo and almost everywhere else that currencies are traded, investors and speculators were betting on the dollar with an enthusiasm that looked more and more like frenzy. The American currency fetched 3.3 West German marks, a 13-year high. In Britain, the pound was near a level that once seemed unthinkable: parity with the dollar. Worth $4.03 in 1949 and $2.40 as recently as 1980, the pound at one point last week was worth $1.08. The dollar has even been gaining in value against the sturdy Japanese yen. It reached 260 yen in Tokyo, a rise of 15% since 1980.

The upward surge of the superdollar was news around the globe. THE DOLLAR IS DEFYING ALL LAWS OF GRAVITY exclaimed Madrid’s financial daily Cinco Dias. Newspapers across France’s wide political spectrum were equally excited. Read the front page of Paris’ conservative Le Figaro: OVER 10 FRANCS, THE DOLLAR HAS GONE THROUGH THE CEILING. One edition of the Socialist tabloid Le Matin included a replica of a $1 bill. By buying a copy for the newsstand price of 4 francs, the newspaper proclaimed, readers could get a “dollar” at a 60% discount.

Repercussions from the surge of the dollar were political as well as financial. In Rome, Italian Prime Minister Bettino Craxi called a special meeting of several Cabinet ministers to discuss what could be done to protect the lira. Said Lamberto Dini, the director general of the Bank of Italy: “Everyone is concerned, both in Italy and in Europe, because what is emerging is an unsustainable pattern of exchange rates.” During her scheduled meeting with President Reagan in Washington this week, Britain’s Prime Minister Margaret Thatcher intends to press for assurances that the Administration will take early steps to cut the U.S. budget deficit and thereby slow the rise of the American currency. Her Deputy Prime Minister, Lord Whitelaw, warned of “very serious consequences for the world economy” unless action is taken. Apparently bowing to that kind of pressure, Treasury Secretary James Baker revealed late in the week that the U.S. has changed its exchange-rate policy. By selling dollars on a more regular basis in foreign exchange markets, the Government is actively trying to keep the currency’s value down. Until recently, the Administration had said that it would intervene only when the markets were especially volatile. On Friday the value of the dollar dropped back from its record highs, and the Administration’s new policy may have played a role in the dip.

Last week’s currency-market gyrations demonstrated both the benefits and the detriment of a strong currency. The first-blush effect for Americans is good. A mighty dollar turns the world into a buyers’ paradise for U.S. tourists. Americans appear to be signing up in record numbers for European vacation trips, to find antique bargains in London and enjoy three-star meals in Paris. Travel agencies report bookings are up more than 100% over last year. Says Jane Levin of Boston’s Garber Travel: “Europe is going to sink into the ocean under the sheer weight of American tourists. In 24 years in the travel business, I have never seen it so busy so early. It’s incredible.” The strong dollar has also brought benefits to the American consumer. By making imports cheaper, the dollar’s rise means that consumers have more foreign products to choose from. It has forced U.S. companies to become more competitive. As a result, the prices of thousands of products, both foreign and domestic, have been held down. Economists estimate that the U.S. inflation rate, currently running at 4%, would be about 8% were it not for the strength of the U.S. currency.

The dollar’s rise, however, also has a darker side. It has made the products of U.S. firms more expensive abroad at the same time that they have to compete with lower prices for foreign goods at home. Complains Edward Jefferson, chairman of Du Pont: “Since 1980 the rise in the value of the dollar has put a 50% surcharge on all U.S. goods sold abroad, and a 50% subsidy on all imports.”

America’s trade balance has deteriorated badly on both sides of the ledger. Between 1981 and 1984, exports fell 7% while imports surged 25%. Last year the U.S. had a record-shattering trade deficit of $123 billion. The rush to import takes profits away from U.S. companies and paychecks from American workers. The impact must be measured not only by layoffs and closed plants but by factories not built and expansions not made. C. Fred Bergsten, director of the Institute for International Economics in Washington, estimates that by 1986 the U.S. will have lost 3 million jobs in industries that export or compete with imports.

President Reagan is beginning to hear howls from Congressmen and lobbyists demanding protection against cheap imports. Motorola President John Mitchell has called for a 20% surcharge tariff on all foreign imports, and he is getting an increasingly sympathetic hearing on Capitol Hill. The Administration is also sensitive to the problems posed by the strong dollar. Conceded White House Chief of Staff Donald Regan: “We see the damaging effects, but we are puzzled as to how to get the dollar down.”

For industries and corporations that depend heavily on foreign trade, the impact of the superdollar has been devastating. Caterpillar Tractor, the longtime world leader in sales of heavy construction equipment, lost $180 million in 1982, $345 million in 1983 and $428 million last year, primarily because of a drop in sales abroad. Says Chairman George A. Schaefer: “The worsening trade crisis urgently requires action by the U.S.” The company’s work force has shrunk from 89,000 five years ago to 60,000. Ernest Uebel, 29, a former mill operator at a Caterpillar plant in Montgomery, Ill., has been laid off three times since 1982 and is now studying to become an electronics technician. Says he: “I’ve been on a bit of a roller coaster. I don’t know where else to point the finger except at the dollar.”

The manufacturers of private aircraft like corporate jets are also having a rough time selling overseas. In Wichita, which calls itself the General Aviation Capital of the U.S. because it serves as the headquarters of firms such as Beech, Cessna and Gates Learjet, the number of people working in plane construction has dropped from 27,000 to 13,000 since 1980.

The robust dollar is an added burden to American farmers, who are already suffering from steep interest rates, heavy debts and falling land values. In the late 1970s U.S. farms sold 40% of their crops overseas, but now the high price of American agricultural products is prompting many foreign customers to turn to agricultural competitors such as Brazil and Argentina. Partly because of the dollar, American exports of wheat have fallen by 20.3% since 1980, soybeans by 20.8% and corn by 23.5%.

Farmers are concerned that the U.S. will begin to import large amounts of foreign grain because of the strong dollar. A St. Louis grain elevator has already bought some Swedish oats. Chicago’s commodity exchanges were abuzz last week with the rumor that a ship loaded with Chinese corn is steaming toward the U.S.

Perhaps the most ominous danger from the dollar’s climb is that it will destroy America’s edge in the production of high-technology goods. A study by Stephen Roach, a senior economist at the Morgan Stanley investment-banking firm, showed that between the fourth quarter of 1982 and the third quarter of 1984, imports of such high-tech gear as communications equipment, computers and office machinery rose by 218%.

The strong dollar is also a mixed blessing for the rest of the world. Other countries are able to export more goods to the U.S., stimulating their economies. Says Christian Laine, an economist at the French bank Credit Lyonnais: “In many parts of Europe, industries are benefiting–chemicals, iron and steel, machine tools, cosmetics, aerospace and telecommunications. Without the strong dollar, we could have had a general recession in Europe.” Between 1982 and 1984, West Germany’s exports to the U.S. rose 42%, France’s climbed 47%, and Italy’s were up 52%.

Almost 50% of world trade is in dollars. Thus when the value of the dollar increases, bills for those products also go up. Oil producers, for example, demand payment in dollars. Even though they have been reducing their dollar prices, the cost of crude in European currencies has stayed stable or, in some cases, even risen. In Belgium, the cost of home heating fuel has jumped 12% in the past two weeks.

Businessmen fear that the strong dollar will force the U.S. to close its markets to foreign products. Says Aldo Palmeri, managing director of Italy’s Benetton Textile group: “Our overseas exports are increasing by 100% a year, but before long American industry will be demanding restrictive measures against imports.” Concurs Switzerland’s Fritz Leutwiler, former president of the Bank for International Settlements: “We should be very concerned about the high dollar pushing protectionism in the United States.”

Perhaps the most dangerous effect of the roaring dollar is the instability created in the international economy. Business works best in an atmosphere of known and predictable situations. When a currency as important as the U.S. dollar rises for no apparent reason, crisis becomes an executive’s fellow traveler, and business suffers. Warns Henry Kaufman, the chief economist of Wall Street’s Salomon Brothers: “This movement upward in the value of the dollar will, eventually, undermine our economic and financial stability.”

Perhaps surprisingly, many economists put the primary blame for the strong dollar on the U.S. budget deficit, which is expected to reach a record $220 billion this year. According to this argument, the Government’s voracious appetite for funds has kept U.S. interest rates at steep levels. That has enticed foreigners to invest huge sums of money in the U.S., which has driven up the value of the dollar. Among the leading advocates of this theory are Federal Reserve Chairman Paul Volcker and Harvard Professor Martin Feldstein, who was chairman of Reagan’s Council of Economic Advisers until he resigned last summer. Their views are widely shared in Western Europe. Wrote former West German Chancellor Helmut Schmidt in the newspaper Die Zeit last week: “The astounding recovery of (Reagan’s) economy over the past 24 months and his view of the economic future rest largely on other people’s money.”

The U.S. is expected to become a debtor nation this year for the first time since 1917. The Institute for International Economics predicts that if the dollar stays strong, the annual U.S. trade deficit could hit $200 billion in 1990. By that time, says the institute, the U.S. could owe foreigners more than $1 trillion.

Some experts, including several top monetary officials in the Reagan Administration, argue that the budget deficit and interest rates have little to do with the dollar’s value. They note that the dollar has continued to rise even though the difference between interest rates in the U.S. and Western Europe has narrowed considerably in recent weeks. Thus, they argue, it is the dynamic performance of the U.S. economy, not high interest rates, that is drawing in foreign capital. Observes Republican Congressman Jack Kemp of New York: “I don’t see people lining up to buy Peru bonds despite high interest rates down there.” Concurs a senior Treasury official: “The attractiveness of the U.S. economy is a real factor in the dollar’s strength.”

One indication of foreigners’ confidence in the American economy is that they have not just parked cash in bank accounts with hefty interest rates. They have also invested in U.S. stocks, bonds and real estate. Between 1981 and 1983, the amount of foreign money in American stocks increased 50%, to $97.2 billion. Says Edward Hudgins, an economist at Washington’s Heritage Foundation: “Today the robust dollar reflects America’s political stability, economic strength, productivity and the high return on direct investment that has been spurred by policies rewarding private initiative and entrepreneur- ship. The U.S. is viewed by investors as a safe haven, and the dollar a secure store of value.”

Nervousness about a possible collapse of the dollar, however, is growing in both Europe and the U.S. Says a top American financial official: “No one wants to be the first to jump out of dollars, where they have been doing very well. But what if that changes? Someone will jump first, and others will follow, maybe in a rush.” Lawrence Brainard, chief international economist of New York’s Bankers Trust, believes that the dollar has reached such a level that “it is no longer possible to conceive of a soft landing. The rout of the dollar has become inevitable.” Gilbert de Botton, chairman of Global Asset Management in London, predicts a 30% decline in the dollar’s value.

The majority of experts, though, believe that the dollar will remain high. “There’s nothing in the current economic picture that indicates we’ve reached the top yet,” says Denis Karnosky, research director at Chicago’s Heinold Commodities. “Everything argues for the continuing strength of the dollar.” Rimmer de Vries, chief international economist at New York’s Morgan Guaranty Trust, agrees: “A decisive change in the dollar may be some time away.”

The type of currency-market intervention disclosed by Treasury Secretary Baker last week may temporarily calm world currency markets, but that will not provide the long-term solution to the dollar problem. In a report released last week, the President’s Commission on Industrial Competitiveness, a group of 31 leaders from business, labor, government and academia, proposed a more comprehensive program for bringing down the dollar and improving the U.S. trade balance. Among the commission’s recommendations: a sharp reduction in the federal budget deficit to reduce interest rates, creation of a Cabinetlevel Department of Trade to promote exports, establishment of a Department of Science and Technology to foster research and development.

The Europeans will also have a role to play in stabilizing the dollar’s value. Herbert Giersch, an economist at West Germany’s University of Kiel, argues that European governments should adopt measures to help their economies grow faster and attract more investment. He proposes tax relief to entrepreneurs, incentives for venture-capital investments and turning many state-owned enterprises back to private buyers, as Britain is doing. Says Paul Craig Roberts, who once served as chief Treasury economist under Reagan: “If the Europeans want stronger currencies, then they should look to their own economies.”

Finally, the Japanese, who often sit on the sidelines during international economic turmoil, could help settle currency markets by making it easier for foreigners to invest in securities denominated in yen. The country should speed up its efforts to bring down import barriers and thus reduce its gigantic trade surplus, which is expected to reach $55 billion this year.

The dollar is more than just the currency of the U.S.; it is also the world’s money. Until government leaders can find ways to make it much stabler, no businessman engaged in international finance or trade will be able to rest easy.

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