Further Decline of Dollar Could Be Perilous: Volcker

Federal Reserve Board Chairman Paul A. Volcker voiced renewed warnings about the dollar today, saying its value has fallen to a point at which further reduction could be dangerous and trigger inflationary pressures.

In testimony before the Joint Economic Committee of Congress, Volcker said the weakness of the dollar in currency markets and the threat of renewed inflation could tie the hands of the Fed in directing the economy.

He said that the declining value of the dollar in the last year and a half was constructive in helping the United States improve its trade balance but that it had its dangers.

Asked whether the dollar is at a point at which it could generate inflationary pressures through higher import prices, he said, “Yes, we are at that point.”

Volcker also warned that uncertainties about the U.S. currency could discourage foreign investment in dollars. The United States has needed a steady flow of foreign capital to help finance its huge trade and federal budget deficits.

If foreign investors start to shy away from dollars, the Fed could be forced to raise interest rates to maintain the flow of foreign capital.

Volcker’s expressions of concern about the dollar’s weakness and of possible inflationary pressures later in the year suggest that the Fed may prefer to wait before it cuts its key discount rate again, analysts said.

Many financial analysts had expected the Fed to cut its key interest rate early this year. But many now are saying they expect the central bank to delay another cut from the current level of 5.5% until spring, mostly because of the dollar’s weakness.

Volcker told the panel that the dollar’s decline so far has been benign because inflation has been well under control. However, he said, the inflation rate could begin to accelerate later in the year.

Beside pressures from a weakening dollar that will increase the price of imported goods, Volcker noted, oil price declines have been reversed.