Time to Brake Dollar’s Drop, Volcker Warns
Federal Reserve Chairman Paul A. Volcker, breaking ranks with the Reagan Administration, said Wednesday that he believes the dollar has declined enough on foreign currency markets and efforts should be made in other areas to reduce the country’s soaring trade deficits.
Volcker also warned that the United States has been living in a “false paradise” in which it has grown dependent on heavy flows of foreign capital to keep its standard of living rising. He said this situation cannot go on forever.
Testifying before the House Ways and Means subcommittee on trade, Volcker distanced himself from remarks made last week by Treasury Secretary James A. Baker III concerning the need for the dollar to decline further in order to correct the country’s huge trade deficit.
In a warning to the Japanese and West Germans, Baker said he was prepared to push the dollar lower on foreign exchange markets unless those countries cut interest rates as a way of stimulating their economies to expand markets for American exports.
Dollar at Five-Year Low
The dollar immediately fell to a five-year low against the West German mark and also dropped against the Japanese yen, actions that in theory should make it more difficult for those countries to sell their products in the United States.
To fight back, countries of the European Communities announced last weekend that they were prepared to prop up the value of the dollar against any U.S. intervention effort to preserve their own markets in this country.
Volcker, asked Wednesday about the dispute, said he agreed with the Europeans.
“I don’t want an overly depressed dollar either,” he said.
Volcker said further declines in the dollar run the risk of igniting inflation in this country and also would depress economic growth in foreign countries where the United States is hoping to expand export sales.
He said the United States must begin to depress domestic demand, through possible changes in fiscal policy such as reducing the huge budget deficit, while pushing for higher sales of American goods overseas.
