COLUMN ONE : Costs of Declining Dollar Rise : The greenback is feeble, even in world crisis. Americans abroad feel the pinch, and the nation’s economic and political voice is weakened.

Duane Catton, an American who has worked here for five years, is window-shopping with his wife and two young daughters at some of Rome’s fanciest boutiques. They dare not venture inside to actually buy something.

A scarf would cost him $200, a simple gray sweat shirt $100, and some lines of jeans more than $100. That’s because Catton would have to pay in Italian lira, but Catton’s paycheck comes in dollars and they’re worth fewer lira these days.

Boston’s Jerrold Mitchell is among the reasons the Cattons’ dollars won’t buy as much as they used to. The manager of $40 billion in mutual funds and pension funds believes the best investment opportunities are overseas--in stocks and bonds that can be bought only in German marks, French francs, Japanese yen and Italian lira and not in U.S. dollars. So the dollar loses value, just as surely as the price of apples drops when people decide to buy pears instead.

The U.S. dollar now looks more like a lemon, sinking in value when an international crisis normally would have sent its value skyrocketing on currency markets. And therein lies a tale of America’s new, diminished role on the world economic stage.

Plagued by fears about a recession and unease over the United States’ long-term economic strength, the dollar was losing value long before Iraq invaded Kuwait on Aug. 2. After the invasion, it continued its embarrassing slide.

The currency has recently hit postwar lows against the German mark and is now weaker than it was during the late 1970s period of stagflation, a malady that mixed little economic growth with plenty of inflation. It has bounced back a few percentage points since Jan. 1 as the prospect of war in the Persian Gulf has mounted but is still considered to be extremely undervalued.

As for the world’s other mighty currency, the Japanese yen is nearly twice as strong against the dollar as it was in 1985. And although the dollar is somewhat higher against the yen than it was at its all-time low at the end of 1987, it has not gained ground against the yen, as it has against the mark, since Jan. 1.

Now, when the world looks for financial security, it doesn’t reflexively look to the United States. “The U.S. dollar is no longer, from the international investor’s standpoint, the only safe haven,” says Ernst Moritz Lipp, chief economist of Dresdner Bank in Frankfurt, Germany. “Other currencies have caught up, notably the German mark and the Japanese yen. And the French franc no longer carries the ‘unsafe’ label.”

The money problems that a falling dollar creates for overseas residents like the Cattons is only a symptom of something bigger. Just as the Cattons find their dollars buy less, so too is the United States coming up short as it seeks to pay the bills arising from a military and economic presence abroad. Paying for armed forces abroad is now more expensive than ever, and foreign aid in dollars is worth far less.

“A low dollar makes it that much harder for America to provide development and military aid around the globe,” says J. Nicholas Robinson, a London-based economist for Chase Manhattan Bank.

In part because of the decline of America’s currency, Japan’s official foreign aid is worth more in dollars than that of the United States. When it was reported last year that Japan had supplanted the United States as the foreign aid leader in 1989--with a total of nearly $9 billion compared to America’s $7.7 billion--a Japanese Foreign Ministry official called it an “epoch-making development.”

The falling dollar “helps to weaken the U.S. voice, particularly in economic arguments but also in political arguments,” notes Nigel Gault, an economist in London for the consulting firm of DRI-McGraw Hill.

U.S. Borrows More

America’s tarnished image in the eyes of international investors also has ramifications for the U.S. economy itself. As the government collects fewer dollars in taxes than it spends--running a bloated federal deficit--it has sought to borrow much of the difference from overseas.

But the U.S. government and corporations have begun to falter in efforts to attract money from abroad. During the first half of last year, for the first time since the stock market crash in the second half of 1987, more capital flowed out of the United States than flowed in, according to John Lipsky, a London-based economist with the investment banking firm of Salomon Bros.

Japanese investors, whose enormous U.S. investments in the 1980s helped finance huge budget deficits, have cut back on purchases of new government bonds. U.S. Treasury securities currently represent an estimated 30% of Japanese foreign bond investments, well below the 50% level of 1985. And in a Treasury auction last November, the Japanese bought only about one-fifth to one-quarter of what was sold, compared to the 30% that has been more typical in recent years.

While U.S. interest rates are slipping, the falling dollar tends to keep them at a level higher than they normally would be. The government must offer higher rates if foreign investors fear investments in the United States will lose value as the dollar sinks.

The importance of foreign investors presents the United States with a dilemma: If rates are kept high to attract overseas money, the U.S. economy may be strangled; if rates are lowered to revive the economy, overseas investors will flee and the government won’t be able to borrow what it needs.

Meanwhile, American investors are looking ever more favorably on placing their clients’ money overseas. Mitchell, senior vice president of Wellington Management in Boston, is particularly attracted to Europe. “It’s simple,” he says. “Interest rates are higher overseas than in the United States, and in the U.S. they’re still falling.”

Mitchell also finds stock markets more attractive in Tokyo and Frankfurt than in New York, although he is poised to start buying American stocks when the stumbling U.S. economy, now apparently sinking into a recession, shows signs of rebounding. “But this isn’t the time yet to invest here,” he says.

Mitchell’s strategy is bad news for the dollar and for Americans who have to rely on dollars overseas. Catton, for example, is paid in dollars by the U.N. Food and Agricultural Organization. Those dollars buy barely half as many Italian lira as when he came to Italy in 1985.

“Five years ago,” he laments, “you could buy a brand new car for $4,000. Now $10,000 is the best you can do. You can’t even buy a pair of socks for less than $15.”

Tourists abroad must navigate the same waters. “I was last here a year ago, and I can feel the difference,” says Silvia Canetto, a visiting professor of psychology at the University of Vermont, as she walks around the Colosseum. “I try to avoid going to restaurants; the prices have gotten too high.”

Donald McNeill and Fannie Peczenik, who are accustomed to the high prices of New York City, recently arrived here so that McNeill can begin a two-year stint as a physicist at an Italian laboratory. For their first lunch they spent 42,000 lira--nearly $40--for a modest offering of pasta, mixed salad and mineral water.

“You can feed three in New York for what it takes to feed two here,” Peczenik says.

The flip side of Peczenik’s grievance is that foreign tourists are finding the United States an increasingly cheap place to spend a vacation. Arke Reizen, the second largest travel agency in the Netherlands, is offering a nine-day package in Florida--air fare, hotel room and car rental--for about $700 per traveler, and it will reduce the price below $600 during Florida’s off-season.

By contrast, the cheapest off-season package from New York to Amsterdam offered by Carlson Travel Network, America’s biggest, is about $1,000. And that does not include a rental car, a notoriously costly item in Europe.

The U.S. Commerce Department’s travel and tourism administration says foreign travelers to the United States have vaulted by 60% since the dollar began its long decline in 1985, to an estimated 40 million in 1990. U.S. travelers abroad, who now barely outnumber foreign travelers to the United States, grew by only 25% during that period, to 44 million.

It may not be much consolation to Americans traveling abroad now, but most economists expect the dollar to reverse its slide, probably after the U.S. economy pulls out of a recession.

Lipsky, the Salomon Bros. economist, has computed what he considers to be the dollar’s “fundamental value”--a measure of its purchasing power. Because inflation in the United States since 1973 has exceeded that in Germany and Japan, the dollar’s “fundamental value” has declined since then against the mark and the yen.

But the dollar’s actual decline has been much greater still. By Lipsky’s reckoning, the dollar is now selling for about 25% less than its fundamental value against the mark and 40% less against the yen.

Lower Dollar Demand

The reason, say Lipsky and most other economists, is a simple matter of supply and demand. People simply don’t want as many dollars as they used to.

The U.S. economy is now much weaker than those of Japan, Germany and most of continental Western Europe. So the Federal Reserve is nudging interest rates down in the United States in hopes of stimulating the economy. At the same time, most of the world’s other industrial nations are holding rates steady or even increasing them, to keep inflation in check.

Michael Daley, a London money manager for the Morgan Stanley investment bank, says five-year government notes in the United States offer only about a 3.5% real yield, after adjustment for expected inflation. Comparable rates are higher in all the other major industrial countries, ranging from 4.25% in Japan to 6.1% in Germany.

“The long-term value is no longer in the United States,” Daley says. “It is in Japan and Europe, especially Germany.”

A weak dollar is a blessing for some, particularly export-oriented American companies. Their products seem cheap to foreigners who buy them with their stronger currencies. That has fed a U.S. export boom, which has helped keep the bottom from falling out of the American economy. The economy grew at a 1.4% annual rate in the third quarter of 1990, but it would have edged up only 0.4% without a $3.5-billion export spurt.

The story of Caterpillar, the Illinois farm machinery manufacturer, is common. While U.S. sales flattened out, exports grew by a healthy 10% in the third quarter of 1990. “Exports are continuing to be stronger than domestic sales,” says William C. Lane, a Caterpillar trade specialist.

In fact, some of America’s trading partners have begun to complain that U.S. companies have gained an unfair price advantage. “Neither the United States nor the rest of the world has a long-term interest in the excessive fall of the dollar,” says Marc-Antoine Autheman, a top adviser to French Finance Minister Pierre Beregovoy.

Beregovoy is seeking a full-scale review of the dollar’s slide--and possibly an agreement to try to stop it--when the finance ministers of the seven leading industrial nations meet Jan. 20 in New York. U.S. officials, however, have been happy to let nature take its course, and no decisive action is expected from the finance ministers’ meeting.

But Americans who work abroad promoting U.S. exports relish their companies’ good fortune while bemoaning the dollar’s impact on their paychecks. They have watched the value of their dollars erode by half against many major foreign currencies since 1985.

Most employers try to adjust wages to offset the dollar’s decline. But most employees say they are too little, too late.

“The company has helped immensely,” says Brussels-based William Houtz, General Dynamics’ director in Europe for commercial satellite launches. “But even with promotions, I can buy fewer Belgian francs than when I came here 4 1/2 years ago.”

Robert Keller, director for international personnel in General Dynamics’ St. Louis headquarters, says the company now pays an $11,000 salary adjustment to a husband and wife in Brussels with a base salary of $40,000.

“You can’t recruit or retain employees if you’re not willing to pay,” Keller says.

But he concedes that the adjustments never seem adequate to foreign-based workers. “All the information lags,” he says, “and it takes time to crunch the data.”

Euro Disney, Walt Disney Co.’s theme park under development 20 miles east of Paris, in effect pays its employees in French francs, thus insulating them from the dollar’s decline from nearly 6 francs when the operation began in earnest a year ago to barely more than 5 francs now. Moreover, Euro Disney offers incentive pay designed to entice Americans to the Paris project.

“Nobody over here is getting rich,” says Tom Jacobson, costuming director for the new theme park. “But we’re maintaining the same standard of living as at home.”

American Foreign Service officers in many foreign capitals are not. The State Department, its budget squeezed by last fall’s deficit-cutting agreement between the White House and Congress, actually reduced cost-of-living allowances last fall for many embassies. Its rationale was one that didn’t take into account the dollar’s declining value: Inflation had been greater in the United States than in Europe, and so the relative cost of living in Europe had declined.

Thus Jack and Bonnie Moynihan--he works at NATO headquarters in Brussels, she at the American Embassy--absorbed a pay cut even though their dollars could buy barely 30 Belgian francs at the end of 1990, against 36 at the beginning.

“They assume in Washington that we’re on extended vacations over here, which of course we’re not because we can’t afford to go anywhere,” complains Bonnie Moynihan.

The Moynihans manage to send their older son to Harvard and, with the government covering part of the costs, their younger son to high school at the International School of Brussels, where tuition is about $15,000 a year.

But they have cut back elsewhere. “It’s touchy,” says Bonnie Moynihan. “When the dollar is strong, we love it. When it’s not, we tighten our belts.”

THE DOLLAR’S SAGGING BUYING POWER

An average urban American family of four with income of $75,000 spends $30,750 on goods and services, a category that includes food, clothing and transportation but excludes housing and education.

Here, for a family newly transplanted overseas, is how much it would have needed in December, 1989, and December, 1990, in 12 cities around the world in order to have the same purchasing power.

The increase from 1989 to 1990 largely reflects the dollar’s declining value during that period.

1989 1990 United States $30,750 $30,750 Tokyo $82,102 $94,095 Singapore 44,895 49,507 Sydney 39,667 42,127 London 47,355 63,960 Oslo 63,037 76,567 Brussels 51,045 61,807 Paris 48,277 62,115 Rome 47,970 58,117 Nairobi 29,520 33,210 Kinshasa 48,585 50,430 Buenos Aires 33,825 51,352 Sao Paulo 41,820 49,507

Source: Organization Resources Counselors

THE DOLLAR’S UPS AND DOWNS

(Annual averages except for 1990, which shows year-end value)

1980 1981 1982 1983 1984 1985 German mark 1.82 2.26 2.43 2.55 2.85 2.94 British pound .43 .50 .57 .66 .75 .78 French franc 4.23 5.43 6.57 7.62 8.74 8.98 Italian lira 856 1,137 1,353 1,519 1,757 1,909 Japanese yen 227 221 249 238 238 239 1986 1987 1988 1989 1990 German mark 2.17 1.80 1.76 1.88 1.49 British pound .68 .61 .56 .61 .52 French franc 6.93 6.01 5.96 6.38 5.08 Italian lira 1,491 1,297 1,302 1,372 1,137 Japanese yen 168 145 128 138 135

Source: Organization of Economic Cooperation and Development