The Reagan Administration’s effort to shrink the nation’s trade deficit through an international assault on the value of the dollar could backfire unless the dramatic weekend announcement is followed up with further actions to narrow the U.S. budget deficit and stimulate growth abroad, analysts said Monday.
The initial reaction in international currency markets was favorable, with the dollar falling about 6% against most major currencies.
“But this move could boomerang on them unless there is some evidence of action on our side within the next few months,” said Robert Roosa, a former top Federal Reserve Board official and now a partner at Brown Bros. Harriman & Co., a New York investment firm.
The statement Sunday by finance ministers and central bankers from the United States, West Germany, Japan, France and Britain that their governments are prepared to intervene together in currency markets to drive the dollar down is part of an Administration campaign to head off protectionist measures in Congress and avert a possible trade war by holding out the promise that the nation’s record trade deficit will soon begin to shrink.
President Reagan followed up Monday with a speech calling for stronger efforts to remove foreign barriers to U.S. products.
But analysts, arguing that the high dollar rather than foreign barriers is the driving force behind the trade deficit, found little in Reagan’s speech to hold out the hope that the trade gap would narrow.
And they were skeptical that the Reagan Administration is willing to move strongly enough to bring the high-flying dollar down to a level where U.S. products will be priced competitively with foreign goods, thus helping to save jobs in such troubled American industries as steel, chemicals, textiles and farm equipment.
“Intervention can only help for a short period of time,” said John D. Paulus, managing director and chief economist at the investment bank of Morgan Stanley in New York. “For the program to work over the long run, Europe and Japan need to ease fiscal policies while the U.S. would have to close its budget deficit. Frankly, I don’t see any evidence of either.”
Rates Kept High
Many economists are convinced that a key reason for the overvalued dollar is the massive U.S. budget deficit, which has forced the Federal Reserve to keep interest rates high enough to attract foreign capital to finance the deficit and other private borrowing needs.
The resulting strong dollar has depressed the price of imports in U.S. markets and driven up the price of U.S. goods overseas. That in turn has contributed to a trade deficit expected to reach as high as $150 billion this year.
For the near-term, the Treasury Department--by signaling a change in the Reagan Administration’s opposition to currency market intervention--won plaudits from most analysts for its willingness to take active steps to drive the dollar down.
“This was a very well-timed event because the dollar was primed to fall and there was growing sense in the market that it was fundamentally overvalued,” said Allen Sinai, chief economist for Shearson Lehman Bros. in New York. “But unless it is followed up by some actions to correct the fundamental imbalances in the U.S. economy, they will not achieve the lasting adjustments that are needed.”
Most analysts were surprised, however, that Reagan did not follow up Sunday’s announcement with a strong statement of support for forcing the dollar down.
In Monday’s speech, Reagan did little more than acknowledge that he “authorized Treasury Secretary (James A.) Baker to join his counterparts from other major industrial countries to announce measures to promote stronger and more balanced growth in our economies and thereby the strengthening of foreign currencies.”
“I don’t see that as a very ringing endorsement,” said C. Fred Bergsten, president of the Institute on International Economics. “It’s important that the President, who has continually linked the strong dollar to the health of the U.S. economy, publicly acknowledge that the dollar needs to come down.”
50% Above Low Point
After the close of business Monday, the U.S. dollar had fallen more than one-fifth from its peak in March, but it is still more than 50% above its low point in early 1980, according to a Federal Reserve Board scale that weighs the dollar against a basket of other major world currencies. Most economists argue that the dollar must fall by another 20% to 25% before the U.S. trade deficit can shrink significantly.
Thanks to the high dollar, economists say, nations that export to the United States have been able to build large profit margins into their price structures and still undersell their U.S. competitors. Thus, any initial decline in the dollar merely would cut into profit margins and not force foreign exporters to raise their prices.
And even if the new actions are successful in driving the dollar lower, Administration officials warned, it could be more than a year before the benefits will be clear.
‘Some Time Lag’
“As far as effects of a lower dollar are concerned, there’s some time lag,” Treasury Secretary Baker said. “It may be as much as 10 to 18 months before you see an effect from that in the trade figures.”
But whether the leading industrial nations can convince traders in the swirling currency markets, where as much as $100 billion to $150 billion changes hands daily, that their new efforts to cooperate more closely will pay off in a lower dollar remains an open question.
“There is still a great demand for dollars in the world, and I’m not convinced that these initial actions can stem the tide for very long,” said Tony Senecal, head of foreign trading operations for Security Pacific National Bank in Los Angeles. “We’ll have to wait and see whether the major industrial nations can really follow through on what they have promised.”