Strengthening Dollar Has Rewards, Risks
In the computerized trading rooms where national currencies are swapped across oceans, the prized commodity these days isn’t the German mark, Japanese yen or British pound.
To a surprising degree, the U.S. dollar has emerged as a currency of choice this year, with traders seeming to agree: Economic prospects now appear better in America than they do overseas.
“We’re moving into a recovery mode,” explained Robert A. White, a vice president at First Interstate Bank Ltd. “The rest of the world is moving toward a recession and slower growth.”
The dollar has lost a bit of ground in the last few weeks, as signs of economic weakness in this country have persisted. On Tuesday, it slumped further on word that the confidence of American consumers declined in May. The dollar bought 1.6935 German marks, off from 1.7035 on Friday, and 137.45 Japanese yen, off from 138.25. The British pound rose to $1.7485 from Friday’s $1.7355.
The dollar could sag still more if upcoming news on the economy is gloomy.
Nonetheless, many analysts expect the greenback to maintain a general--if irregular--trend upward against a whole market basket of foreign currencies, posing risks and rewards for the U.S. economy.
Ultimately, a stronger dollar could mean lower import prices for foreign products in the United States and higher prices for American products overseas. It would be a boon to Americans traveling abroad, but could make it harder to eliminate the U.S. trade deficit, despite recent progress.
“Some people will decide to go to Europe instead of Lake Tahoe,” predicts David A. Swierenga, an economist at the Air Transport Assn. in Washington. But “it takes some time,” he added, before most travelers adjust their plans to capitalize on currency shifts.
The dollar has gained more than 17% against the German mark since a sharp rise began in early February and continued in the weeks after the Persian Gulf War. It has risen about 13% against the British pound, 8% against the yen and 6% against the French franc in the same period.
Since April, it has squiggled within a narrow range, as traders await further signs that the U.S. downturn is running its course.
Many believe that once the U.S. economy kicks into gear, “The dollar will pick up with it,” said Richard D. Lloyd, vice president and trading manager of Bank America Capital Markets. “I think the dollar is still undervalued to a certain extent.”
A nation’s currency is a vivid symbol, reflecting various things about the country that mints it. Perceptions of political stability and economic strength may heavily influence a currency’s value in the global marketplace.
A country’s interest rates also play a role in determining the worth of its money. In the world economy, investors pick and choose among dollars, yen and a treasure chest of other currencies in search of the highest return.
These days, the dollar’s relative strength seems as much a response to negative expectations for other countries as to positive ones for the United States.
Much of Europe has been in an economic slowdown, with interest rates having fallen in the United Kingdom, Spain, Belgium, Sweden and Italy. Germany, viewed as the lynch pin of a resurgent Europe, now struggles with the economic challenges of reunification. The mark’s luster is further tarnished by worries about unrest in the Soviet Union and elsewhere in Eastern Europe.
“That is the one joker in the deck,” said Jerry J. Jasinowski, president of the National Assn. of Manufacturers. European unrest could propel the dollar substantially higher, he contends.
The dollar also may be benefiting from perceptions of economic vulnerability in Japan. The Japanese economy has been shaken this year by unstable real estate and stock markets. Moreover, there have been signs that Japanese consumers are holding back their spending, posing further risks of a downturn.
“Japan’s economy is very definitely slowing down,” said Carol A. Stone, senior economist at Nomura Securities International in New York. “There’s little question about whether the Bank of Japan will ease interest rates. The only question is what day they decide to do it.”
A further rise in the dollar could affect the U.S. economy--and international trade patterns--in important ways, although it could take a while to happen.
An ascending dollar prompts downward pressure on prices of foreign goods in this country, helping to temper U.S. inflation. After nine to 12 months, a stronger dollar could mean lower prices for imported plastics, semiconductors, metals and other important industrial materials, said Donald Ratajczak, an economic forecaster at Georgia State University.
If that’s encouraging, this same factor also has a negative side: The lower prices for foreign-made goods could make American products somewhat less competitive here and abroad, possibly eroding an important economic advantage for this country.
Indeed, U.S. exports have been one of the few bright spots during the recession and a source of economic growth in recent years.
Consider that between 1987 and 1990, the United States transformed a $26-billion trade deficit with Western Europe into a $4-billion surplus (unadjusted for inflation), according to the Commerce Department, largely because of export gains. There has also been progress--albeit much more limited--with Japan, as the U.S. trade deficit with the giant Asian economy narrowed to $41 billion from $56 billion in the same period.
“The major reason we’ve had this remarkable comeback in manufacturing exports is that the dollar has decreased in value by 40% from the unrealistically high levels of 1985,” Jasinowski said.
Will a higher dollar doom progress toward narrowing the trade gap? That’s not likely, some economists maintain, but it could make future gains harder to come by.
“There’s no question that it (the higher dollar) will have an impact on export activity, probably toward the end of the year,” Ratajczak predicted.
The precise impact is extremely hard to gauge, however. Many U.S. firms have maintained low costs in recent years, which will help them keep prices competitive, even if the dollar gets stronger. In addition, comparative measures of purchasing power suggest that the U.S. currency remains undervalued relative to money from Europe.
In any case, the fortunes of American exporters are linked to more than the latest exchange rate. Economic vitality in other nations plays a huge role in setting demand for U.S. products.
While a stronger dollar will limit U.S. export gains, the effect “won’t be that strong,” said Kevin Logan, chief economist with Swiss Bank Corp. in New York. “What’s more important is whether other economies continue to grow.”
At a more individual level, a stronger dollar will affect people’s traveling plans--but a long lag exists before such changes become widespread.
The Dollar’s Strength The Japanese yen, German mark and British pound all have fallen in value againstthe U.S. dollar since the beginning of the year. Japanese yen: -2.3% British pound: -10.4% German mark: -11.7% Source: Dow Jones & Co.
