Has the past year's heady rebound of the American dollar finally come to an end?
That was the key question late last week as the previously soaring dollar plummeted abruptly on the foreign exchange markets and took one of its worst one-day drops in history.
Once the butt of the currency markets, the dollar had appreciated visibly over the past 12 months -- by 5 percent against the formerly dominant Japanese yen and a spectacular 9.7 percent against the West German mark.
If the dollar does begin to slide again, it eventually would spur U.S. exports further. However, in the interim, a really steep decline also could add significantly to the domestic inflation rate -- a major concern for policymakers here.
By week's end, it still wasn't clear whether the U.S. currency quickly would resume rising or the dollar's year-long party finally was over. But most analysts agreed that another long-term slide did not seem likely.
Last week's sudden dollar turnaround was attributed essentially to two factors:
A prediction here by Citibank Chairman Walter Wriston that interest rates most likely have peaked now -- implying that the 8-percentage-point gap between money costs here and in West Germany most likely will not increase further.
An overt attempt by Otmar Emminger, former head of the Bundesbank, to "talk down the dollar" in an effort to ease the impact of the dollar's recovery on the West German inflation rate.
(In a move calculated to send the dollar toppling, Emminger branded the American currency "extremely overvalued." Ironically, Europeans screamed in early 1977 when U.S. offocials made milder statements.)
Analysts say if Wriston's prediction is correct -- and it now appears that interest rates may start to drop soon -- if may well be that the stream as last has gone out of the dollar's upward push and that further gains, if indeed there are any, will be far less pronounced.
It was, after all, primarily the visible rise of U.S. interest rates resulting from the past several months' rounds of credit-tightening by the Federal Reserve Board that accounted for the bulk of the dollar's recent rebound.
The higher interest rates in the United States siphoned investment money from both Europe and Japan. At the same time, American exports have been unusually strong -- the long-delayed fruits of the dollar's lengthy slide in 1977 and 1978.
Pessimists forecasting a new dollar decline also point to predictions of economic slowdowns later this year in Europe and Japan and to the continuing high U.S. inflation rate, both factors in determining exchange-rate shifts.
If the other major industrial nations enter a slump, they are unlikely to maintain the past year's high demand for U.S. exports. That would hurt our trade balance and help drag the dollar down.
But there also are other developments contributing to the dollar's strength that are not likely to change over the next few months, even if interest rates here begin to fall:
Although the European and Japanese economies will probably slow, analysts say it's unlikely their output will actually decline, as currently is forecast for the U.S. economy.
As a result, outsiders' demand for U.S. exports is not apt to fall off nearly as sharply as Americans' appetites for European and Japanese products. So the slowdown by itself should not worsen the U.S. trade position.
While inflation in the United States currently is running at a breakneck speed, there's a decided possibility it may slow substantially in the second half of year if the quirks in the consumer price index begin to work to U.S. advantage.
Chief White House economist Charles L. Schultze calculates that a 2 percentage-point drop in home mortgage rates and a marked slowdown in energy prices could trim the CPI to an 8 percent annual rate later this year, from an 18 percent pace now.
Although Schultze stopped well short of making that a prediction, many private economists say it isn't all that far-fetched, provided the oil-exporters' cartel does not boost its crude-oil prices sharply.
The turnaround, if there is one, this time is starting at a point where the United States enjoys a sizable surplus in its current account -- trade plus investment flows and other factors -- a key statistic in determining the dollar's value.
The latest forecasts show that even if the trade picture does sour further, the United States still is apt to end up with a slight current account surplus -- or, at worst, a modest deficit -- compared to large red-ink figures expected for Europe and Japan.
What is bothering U.S. allies now is the same dilemma that troubled Carter administration policymakers when the dollar was plummeting in 1978 and 1979: The resulting devaluation of their own currencies is worsening their own inflation.
Exacerbated by rising oil prices, industrial prices in West Germany have been soaring at annual rates of more than 18 percent in the past few months, just slightly less Japan's have been skyrocketing at a 28.3-to-36.1 percent pace.
With world oil prices denominated initially in dollars, the lion's share of the rise stems from the shift in exchange rate changes. (Previously, the rise in the mark and yen helped to shield West Germany and Japan from oil hikes.)
Edward M. Bernstein, the Washington-based international economic consultant, calculates that each one percentage-point drop in the yen adds about 0.2 percentage points to Japan's wholesale price index.
Small wonder than that in the end Emminger has resorted to efforts to knock the dollar down artificially rather than sanction the kind of interest rate hikes West Germany would need to offset the recent U.S. credit-tightening.
But analysts say Emminger's campaign isn't likely to last very long, if only because the U.S. probably would protest formally if it did.
Last week, Robert M. Solomon, a respected Brookings Institution economist who was a key international monetary official at the Federal Reserve Board, branded Emminger's action "outrageous -- as bad as competitive depreciation."
As the markets closed, it was too early to tell where the dollar would go from here. But end of the party or not, economists already were looking back wisfully over the period.
As Solomon mused last week, in many ways, the strenghthening of the dollar over the past few months has been as valuable as a symbol s it has in strict-economic terms.
"If nothing else," the former Fed official said wryly, "it's been healthy for the markets to be aware that the dollar can go up as well as down." Otmar Emminger might not agree.