Economists Say Decline in Dollar Will Boost Exports

The greenback is tumbling again, raising further concern about inflation at a time when the nation is already braced for a new round of oil price increases.

Yet many economists see the decline, so far, as a boon for the economy. They argue that its harmful effects on inflation will be more than offset by its helpful stimulus to the exports that have for so long sustained the faltering economic expansion.

“I say the decline is a net plus, and I say let it continue,” said Paul Getman, economist with Regional Financial Associates, in West Chester, Pa.

Many believe that it will. The dollar closed Wednesday at a slightly higher 1.5660 German marks in New York trading, but in earlier European trading, the currency hit a new post-World War II low of 1.5605 marks.

A month ago, the exchange rate in New York was one dollar for 1.6375 marks. Traders expect to see further declines of 1% to 2% soon in the price, down from a peak of 2.92 marks in 1985.

The dollar has also been weak against other European currencies and the Canadian dollar, although it has not lost a lot of value against the Japanese yen.

The U.S. currency is on the skids because investors believe that a recession is ahead and that the Federal Reserve Bank will lower interest rates to try to boost the economy. A lowering of rates cuts the yields on dollar-denominated investments, so investors are selling dollars and investing in the currencies of countries with higher interest rates, such as West Germany and Japan.

As the dollar falls, it makes the price of imported goods more expensive and heats up inflation.

Robert Dederick, economist with Northern Trust Bank in Chicago, contends, however, that the decline of the dollar will spur the one strong part of the economy--exports.

“This has been a one-wheel economy, and that’s foreign demand,” said Dederick. “On the domestic side, we’ve run out of momentum some time ago.”

Between the fourth quarter of 1988 and the second quarter of 1990, exports accounted for nearly one-half of the growth of the gross national product, he said. When you add the indirect stimulus to the economy from those overseas sales, “you realize it has really been the engine for the whole economy,” Dederick said.

According to the National Assn. of Manufacturers, the average growth rate of 2.5% in the gross national product over the past five years would have been only 1.5% without the export boom, said Stephen Cooney, director of international investment and finance for the group.

Joseph Wahed, economist for Wells Fargo Bank in San Francisco, said Californians have a particular stake in export sales because the state supplies a huge chunk of both the agricultural and manufactured goods that make up U.S. sales abroad.

The roughly $40 billion in annual agricultural exports includes a large share of California fruits, vegetables and meats; the $120 billion worth of capital goods includes California-built aircraft, satellites, electrical equipment and a wide range of other products, he noted.

Gordon Richards, economist with the National Assn. of Manufacturers in Washington, said declines in the dollar translate into a disproportionately strong stimulus to export sales. He said his research indicated that a 10% drop in the dollar’s value yielded a 13% increase in exports.

Economists noted that despite the wide concerns voiced recently about inflation, most experts still expect only a modest uptick in prices. The consensus among economists now calls for a rise of less than 5.5% for the second half of this year; before the Iraqi invasion of Kuwait, the prediction was about 4% for the period, Dederick noted.

Still, economists said too rapid a slide by the dollar could do great harm. If the currency begins to lose value quickly, overseas investors could begin to fear what such a decline would do to their investments and then pull back from buying U.S. bonds or other investments.

In any event, few believe that the Federal Reserve is so worried about the dollar’s decline that it will keep interest rates high to counteract it. “The dollar has never been a top priority of the Fed,” said Getman.

In New York trading Wednesday, the dollar fell to its lowest level since mid-1982 against the British pound and the lowest level since early 1988 against the Swiss franc.

The dollar closed at 1.3055 Swiss francs, compared to 1.3035 on Tuesday. It was traded at 0.5263 pounds, compared to Tuesday’s 0.5272, and 147.65 yen, against 148.80 on Tuesday.