Dollar Hits Lows in Global Market : Currency: The slide reflects Mexico financial rescue and Japan trade deficit, raising specter of interest hikes. But analysts say that the U.S. economy appears healthy.
Under pressure from the shattered Mexican economy and the deep, chronic trade deficit with Japan, the battered dollar fell to new lows Monday in major currency markets around the world. The weekend break in trading did little to calm the roiled international currency business as the dollar skidded to its lowest value against the Japanese yen in the post-World War II era. It also slumped against the powerful German mark, the French franc and other currencies.
“This is not a little blip; this is a long-term trend,” said Lawrence Chimerine, of the Economic Strategy Institute in Washington.
The currency turmoil raises the prospect, however remote, that the Federal Reserve could turn once again to higher interest rates to make the dollar a more profitable haven for foreign investors.
The weaker dollar also makes it more costly for the United States to come to the financial aid of other countries, such as Russia. And it lessens the already limited political appeal of bailing out troubled economies, such as Mexico’s.
Yet for all the potentially damaging fallout from the dollar’s fall, analysts Monday said the U.S. economy itself appears to be in good shape. Dollar speculators seemed more fretful over such developments as the Mexican rescue plan and the defeat of the balanced-budget amendment than over the fate of the recovery.
“I’ve got to believe that concern about U.S. economic policies lies at the heart of the dollar’s weakness right now,” said Gary Schlossberg, an economist at Wells Fargo Bank in San Francisco.
While the beleaguered dollar has not suffered any single knockout punch, it has been wounded by many jabs in recent days. Among them:
* The perception that U.S. interest rates have peaked along with the national recovery, which means that currency investors might reap bigger profits in Germany and other nations.
* Expectations that the U.S. trade deficit is unlikely to shrink very much this year, particularly if America remains out of recession and continues to buy vast quantities of imports.
* Widespread anxiety over the U.S. rescue plan for Mexico, a commitment that has been interpreted by some traders as limiting the Clinton Administration’s ability to protect its own currency with large purchases if necessary.
* A lingering suspicion that U.S. officials are not fully committed to supporting the dollar, because a weak currency can provide a boost to American exporters.
The dollar closed in New York on Monday at 92.80 yen to the dollar, down from 94.05 on Friday. It was trading at 92.87 this morning in Japan. It was valued at 1.4048 German marks, the lowest rate in two years, and 4.9775 French francs, down from 5.0225. The British pound was quoted at $1.6335, up from $1.6295 on Friday.
Economists predicted that the slide would continue. Chimerine forecast a fall perhaps below 90 yen.
“It means very substantial risk for our economic fate in the short and long run,” said international economist C. Fred Bergsten, adding that global investors can pull out of a nation with unnerving speed, as illustrated by Mexico’s current travails.
But the dollar’s decline against more glamorous currencies Monday was balanced by its increasing value against the Mexican peso and the Canadian dollar. Combined, those two currencies account for roughly one-third of U.S. foreign trade, thus limiting the immediate impact the dollar’s weakness in Europe and Japan will have on individuals in this country.
At its broadest, the dollar’s difficulties “remind us of the interdependence of the United States with other economies,” said Bergsten, a senior Treasury official during the Jimmy Carter Administration who now directs the Institute for International Economics, a Washington policy research organization.
The most dramatic illustration of such interdependence is the linkage to Mexico, whose ailing economy is now protected by a $20-billion package of U.S. loans and loan guarantees.
Indeed, the White House commitment is prompting increasing unease in Congress and the financial world. “The Mexican meltdown is drawing down U.S. financial reserves, and it threatens to worsen our trade balance,” said Robert Hormats, a vice chairman of the Wall Street investment firm of Goldman, Sachs International.
Alan Levenson, money market economist at UBS Securities in New York, put it more bluntly: “The perception around the world is that we’ve just adopted a child, and it’s a problem child. You don’t really know what the cost is going to be.”
In one irony, U.S. interest rates are having an entirely different effect on currency fluctuations than on securities markets, which have responded positively to the outlook for rates.
Interest rates are expected to stabilize or even drop in the coming months, but that has prompted many currency traders to unload the U.S. dollar. Currency speculators now look to the recovering economy of Germany, where interest rates could go up this year, for a bigger return on their investment.
Fed Chairman Alan Greenspan reinforced the fears of currency traders, even as he pleased other investors, when he hinted in recent congressional testimony that interest rate policy was on hold for the immediate future.
Given that the outlook for the national economy is sanguine, analysts cited other reasons for the dollar’s stormy times, including U.S. foreign policy.
Carol A. Stone, a senior economist at Nomura Securities International in New York, pointed to anxieties about Mexico and the defeat of the balanced-budget amendment as likely triggers for the dollar’s woes.
“It’s somewhat dismaying that these other issues are negating the advantages of the attractive domestic economy,” she said.
A widely held view that the national recovery is headed for a “soft landing”--economists’ jargon for slower growth with little inflation--would ordinarily be good news. However, in the peculiar prism through which speculators assess a currency, that scenario raises problems for the dollar.
The reason is that ongoing slow growth suggests a continuing trade deficit as Americans continue to buy lots of foreign products and lots of dollars end up in the hands of foreign investors.
Gerstenzang reported from Washington and Peterson from Los Angeles.
