The U.S. dollar in trouble again.
In a slide that began last spring and has worsened steadily ever since, the dollar has plummeted sharply against its two major competitors, the West German mark and the Japanese yen. Almost daily, the headlines report another falloff on the the foreign exchange markets. European officials are wringing their hands in frustration. And some are predicting the decline will continue for months.
The situation has deteriorated substantially in recent weeks. As late as mid-January, officials had expected confidently that the dollar would stage a recovery. For one thing, the American economy is in decidedly better shape than those of other major nations. President Carter had promised fresh support for the dollar. And the Federal Reserve Board had raised domestic interest rates - all positive signs.
Yet, the decline has persisted, to the point where the dollar has become a major concern for American policy-makers. By the middle of last week, the U.S. currency had plunged to record lows against the West German mark, and a rescue move by the Swiss government had ended in failure. "The administration no longer can plan without considering the dollar," says one economist.
The falloff is perplexing because, in the minds of many analysts here, the dollar simply shouldn't be deteriorating as much as it has. While some decline from earlier months may have been justified the U.S. economy is relatively robust, the dollar still is regarded as a good place for investment. It's not all that glum.
Moreover, the U.S. now is more actively commited to trying to counter the downtrend. For much of last year, the Carter adminstration was content to let the currency decline - in part of pressure on the Japanese and West Germans to spur their own economic more. Recently, however, policymakers have grown concerned that the decline has gone too far. And the government has taken steps to bolster the dollar.
Neverthless, the decline is continuing and is creating genuine worries among the United States' major Western allies - a concern some fear could erupt into serious political disputes if the currency continues to fall. The dollar was a major topic at President Carter's question-and-answer session last Thursday. And it seems likely to be on the minds of many Americans for some time to come.
Why is the dollar in trouble, and what does it mean for the average citizen? How long will the slide continue, and what - if anything - can or should the government do to stop it? The Post put these and other questions about the currency dilemma last week to economists, traders, bankers and government officials. Here, rewritten and condensed into a somewhat briefer form, is what emerged:
Q. Why is the dollar in trouble?
A. Essentially because those who trade on the foreign exchange markets are nerovus about the glut of dollars piling in the hands of corporations and individuals overseas - in the form of securities, investments and outright cash. Each of these dollars represents a form of credit, which the holder can cash in. Right now, that credit has exceeded what foreign holders of dollars any longer feel comfortable with. And it's making them nervous.
Q. What's causing this glut?
A. Several things. First, the U.S. is importing far too much foreign oil, which has bloated our trade deficit - and the traders see little to convince them we'll cut down in the future. A sizeable trade deficit means we have to borrow even more. Second, inflation in the U.S. still is higher than that of West Germany and Japan - and that makes our economy more vulnerable.
But there's another factor, which may seem somewhat ironic. The U.S. economy is growing faster than West Germany's or Japan's. While this may be good for the dollar's value on one hand, it also means our trade deficit is less likely to improve. The fact that our economy is more robust means we'll import more foreign goods, but will be unlikely to sell more abroad.
Q.Should I worry about the dollar's decline?
A. Yes, but not nearly as much as recent doomsday headlines make it seem.While a more serious decline in the dolar could have important implications for the U.S. economy, the situation isn't nearly that bad now, and few experts really believe it will reach the crisis stage. If anything, most analysis believe the markets have overreacted, and the slide will end soon.
The main consequence for the U.S. now is that the decline exacerbates inflation here by making imports more expensive. Although estimates like these aren't fully reliable, economists figures that in 1976 and 1977 the dollar's decline added 0.5 per cent a year to the U.S. inflation rate - a significant, but not overwhelming, factor.
But there's been no immediate threat to the national economy or to American prestige. The dollar still is being accepted without hesitation the world over, the U.S. still is an attractive market for foreign investors, and the United States still is regarded as the world's strongest economy. In short, while there's no real crisis yet.
Q. What if the slide continues?
A. Then the dangers would become more serious - possibly spurring new political and economic disruptions. In the narrrowest sense, the decline in the dollar causes jitters in the currency and stock markets, making businesses and individuals more reluctant to invest. A holdback in investment could crimp the economy.
But a further dip also could stir up politcal turmoil. A decline in the dollar means a rise in the West German mark and Japanese yen - a factor that makes it more difficult for those countries to sell their exports. If U.S. allies are squeezed too badly, it could bring on an international dispute - possibly leading to new trade restrictions, slower growth and a worldwide recession.
Most seriously, some experts fear too sharp a fallout could prompt a major increase in oil prices - a move that could damage the U.S. - and world - economies significantly. The dollar's decline makes it more expensive for oil-producing pressure for them to raise petroleum prices. It hasn't come yet, but the producing nations have complained.
Q. How bad has the dollar slide been?
A. The decline has been substantial, but not as much as some of the fretting would imply. While the dollar did hit record lows against the deutschemark last week, the slide over the longer haul hasn't been that dramatic. Indeed, the dollar's value has risen and fallen just as sharply several times over the past eigth years - without worldwide disaster.
Moreover, the dollar has declined mainly against the deutschemark and the yen. It has remained relatively stable against other currencies, and in some cases has risen. For example, in part because of Canada's economic troubles, the U.S. dollar recently has appreciated against the Canadian dollar - the currency of our largest trading partner.
Q. Who benefits - or suffer - when the dollar declines?
A. The clear losers, of course, are foreigners holding U.S. dollars, Americans traveling or working abroad, U.S. troops stationed overseas, domestic firms engaged in importing foreign goods and those who owe debts overseas that are payable in foreign currencies. Those who come out ahead include U.S. exporters and firms without foreign subsidiaries to support.
Caught in between are American corporation and banks that regularly do business abroad. Those that have hedged against the decline by investment heavily in foreign curency by investment heavily in foreign currency or by selling at the right time, are in good shape. Others who got caught in the squeeze may suffer sizeable foreign exchanbge losses.
Q. Who is involved in trading on the foreign exchange market?
A. Lots of people. Corporations and banks that do business overseas need to exchange dollars for other currencies to finance their operations and purchases. Some wealthy investors deal in currencies the way they trade in securities or commodities futures. And governments sometimes enter the market for short periods of time.
Q. What about the speculator?
A. There's some speculation, to be sure, but not all that much. By far the bulk of the trading is done by corporations which need to exchange curriencies to conduct their busines. Although most of this is routine, the companies, like all good businessmen, try to hedge against exchange-rate fluctuations by either speeding up or postponing their transactions.
The problems is , while the currency markets involve a lot of money, the fluctuations in currency values often are decided by marginal movements - so that a relatively few transactions can be set the pattern for an entire day's trading. At the same time, the market often "feeds on" itself - that is, a decline in a currency on one day can spur a further decline a day later.
Q. Some people have expressed fears of an international conspiracy operating to push the dollar down. Is there one?
A. If there's one thing on which experts are united, it's that such theories are rubbish. If there is an international currency conspiracy, no one has come up with any evidence to prove it.
Q. If these big corporations and traders believe the dollar's value should be lower, aren't they right?
A. Not necessarily. Traders may be adept in judging how the market may go from one day to the next, but - as they've proved hundreds of times - they aren't good at interpreting political and economic developments. Indeed, to a good many analysts, the markets often seem to react irrationally - plunging when they should go up in reaction to a situation and soaring when they should decline.
A case in point was the recent remark by Anthony M. Solomon, under secretary of the Treasury for monetary affairs, that the U.S. hadn't had to support the dollar in three weeks. By any sort of logic, the markets should have been elated at this disclosure - because it indicated the dollar had been so stable that no further action was needed. Instead, the dollar plummeted.
In truth, there's little analysts can point to that can rationally explain the latest decline of the dollar. The size of the U.S. trade deficit was known last autumn, before the newest slide. And the energy bill now bogged down in Congress wouldn't have done much to restrain imports if it passed. If anything, there are some cheery notes: Europe's economies are picking up some.
Q. Europeans say the U.S. government is neglecting the dollar. Is it?
A. Not any more. As late as last autumn, policymakers were content to let the dollar decline - in part to pressure the West Germans and Japanese to spure their own economies more rapidly. In recent months, however, the U.S. has become concerned about the turmoil that the slide is creating, and has moved - albeit not always successfully - to stem the decline.
In the past several months, for example, the U.S. has intervened in the foreign exchange markets by buying up dollars to stabilize the trading, and the president several times has reiterated his commitment to maintaining a "sound" dollar. Most significantly, the Federal Reserve has raised domestic interest rates - and enforced it in the money markets - to attract dollars home.
Q. Why hasn't this worked?
A. For one thing, the markets are fickle - as underscored by their reaction to Undersecretary Solomon's statement. For another, the U.S. actions haven't done anything to change the underlying situation the currency traders are worried about - the burgeoning American trade deficit and the oil-import situation.
Q. Well, what can the U.S. do to rescue the dollar?
A. Apart from taking major steps to cut back its oil imports, bolster exports or slow inflation, there's really very little. Intervening in the exchange markets is costly and only temporarily effective. The fact is, all the major Western governments combined don't have enough money to counter basic trends in the markets. All they can do is head off an occasional surge.
The U.S. could raise interest rates here further, but that would only crimp the already moderate economic recovery. Other possibilities include selling part of the nation's gold stock-pile - to cut down on imports of industrial gold - but that would wreak havoc with International Monetary Fund operations. Virtually all such proposals have undesirable side effects.
Q. Then how long will the dollar decline continue?
A. No one really knows for sure. Under the new system of "floating" exchange rates, a cheaper U.S. dollar is supposed to make American exports more attractive, and eventually reduce the size of the trade deficit - a development that should send the dollar moving back up again. But economists concede that could take several years.
For the short run, policymakers are hoping the dollar will snap back a bit - or at least stop falling - when the currency traders begin realizing they've gone overboard in downgrading it. When that will come, however - or where the dollar will go after that - is anyone's guess. If the slide ever reaches true crisis proportions, presumably governments will deal with it.
Q. What about other nations?
A. Both West Germany and Japan have proposed stimulus programs to spur their economies, although neither is as large as the U.S. would like to see. But Carter administration officials are continuing to press West Germany, in particular, to go farther.
Q. Then how will the situation be resolved?
A. Mainly by waiting to see what develops. As of now, neither the U.S. nor the Europeans seems to be preparing to change their view of the situation. How forcefully either side acts will depend on whether the markets reverse themselves or the slide continues in coming months.