As Currencies Swing, the Mediums Matter Less Than the Messages

The dollar is suddenly buying a lot more in many parts of the world, as currency devaluation threatens to become a global trend.

And because paper currencies are not only mediums of exchange but also potent symbols of nationhood, their gyrations can trigger a tide of emotions in financial markets.

But make that mixed emotions--because investors’ reactions to the latest currency shifts are anything but uniform.

In Latin America, for example, stocks plummeted Tuesday amid fears that Brazil, Mexico and other key nations might be forced to devalue their currencies, following the recent widespread plunge in Southeast Asian currencies.

Yet in Germany, stock prices have been surging to record highs over the last few weeks even as the German mark’s value has weakened to a six-year low against the dollar.

For most Americans, meanwhile, short-term currency fluctuations have long seemed an obtuse concept unless one has been physically headed overseas for a business trip or vacation (not a bad idea today, with the dollar’s strength).

Wall Street, however, has periodically worked itself into a lather over currency shifts and their implications for trade and investment flows.

But this time around, the muscle-bound dollar is causing little angst among U.S. investors, who seem to be as happy with the dollar’s strength as German investors are with their own currency’s weakness: The Dow Jones industrial average hit a record high Tuesday, rising 52.73 points to 7,975.71, and U.S. bond yields continue to hover near five-month lows.

What these varied reactions to the latest currency-related headlines are telling us is that currency changes are less important than their root causes in individual economies.

The medium, in other words, is not really the message.

In Southeast Asia, the tumble in currency values over the last two weeks--beginning with the Thai baht’s devaluation on July 2--shouldn’t have come as much of a surprise to the countries involved.

For two years or more, Thailand, Malaysia, South Korea and Indonesia have been running economic and monetary policies that have caused many economists to cringe. These countries have imported capital and investment from foreigners at an increasing rate, even as their export growth has slowed and their capacity to service their debts has declined.

Worst of all, many Asian nations have been obstinate about maintaining a veneer of stable currency values.

The net effect of the latter policy, says economist Michael Ivanovitch at MSI Global in New York, is that “you are really fixing prices” within your economy. A stable currency can imply that everything is OK, when in fact it isn’t. That, in turn, can lead to misallocated capital. Hence, the absurd overbuilding of the Thai and Malaysian real estate markets.

As America learned with its attempt at price controls in the early 1970s, “you distort everything” when you tell the free market it can’t work, Ivanovitch said. “It leads to all kinds of excesses.”

That is what is unraveling in Asia now. Naturally, the lenders (many of them Japanese) who aided and abetted the countries’ economic policies are suffering in turn. And the countries’ currencies are finally sliding to more realistic levels, devaluing for foreigners the assets that probably shouldn’t have been funded in the first place.

Is Latin America next? Many economists don’t think so. Since the Mexican peso’s devastating devaluation of late 1994, Latin American economies in general have been managed far more realistically by their governments than have Southeast Asian economies. Brazil is a worry in the near term because of a rising trade deficit, but it and other Latin countries appear firmly committed to the kind of investor-friendly deregulation, privatization and free-market policies that Asia is only now seeing the need to foster.

In Europe, meanwhile, currency weakness this year has a much different fundamental cause. Unlike Southeast Asian economies, which had been booming but were essentially living far beyond their means, many European economies remain stuck in a slow-growth pattern as they grapple with deep-seated structural reform issues related to planned economic union.

So Europe’s major currencies just reflect the Continent’s financial landscape: low interest rates, low inflation, high labor costs and weak consumer demand.

And while in theory no country should want a debased currency (because it slashes a nation’s purchasing power), struggling Europe for now needs the benefit that a weaker currency brings in making European exports cheaper abroad.

But isn’t that terrible news for American multinational companies? The U.S. stock market obviously doesn’t think so. Certainly, a stronger dollar has some competitive impact on some companies.

Yet for all of the teeth-gnashing that has accompanied dollar moves in recent years, “strong dollar” remains a relative term. This year, against the currencies of our biggest trading partners--Canada, Mexico and Japan--the dollar is flat. And overall, despite currencies’ gyrations in the 1990s, the dollar’s value versus key currencies (after adjusting for trade importance) is no higher than it was in 1993. (See chart, D8.)

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Mixed Buck

The dollar is up sharply this year against some key currencies but is flat versus those of four major U.S. trading partners: Canada, Mexico, Japan and Britain.

Percentage change in dollar’s value since Dec. 31 versus:

French franc: +15.3%

Spanish peseta: +15.3

German mark: +15.1

Singaporean dollar: +9.3

Korean won: +5.7

Brazilian real: +3.8

Mexican peso: +0.8

British pound: +0.8

Canadian dollar: +0.1

Japanese yen: --0.6

Source: Times research