There are a lot of things wrong with the U.S. economy now, but a weak dollar isn't one of them. The persistent pressure on the dollar for more than two years at the end of the 1970s seems, however, to have left an indelible mark on national perceptions.
It's still common wisdom that the dollar is vulnerable and that this is a sign of America's economic failure. Election rhetoric, and even some post-election discussion of the economy, suggested that an ailing currency was part and parcel of America's economic woes.
The figures show otherwise.
In the past three months, the dollar has risen by more than 6 1/2 percent against the German mark, by just under 3 percent against the International Monetary Fund's basket of major currencies -- the Special Drawing Right -- and by 3 1/2 percent against a weighted average of the currencies of major trading partners of the U.S.
Although the rate has not yet regained its spring peak it is stronger than it was a year ago. On Friday the dollar stood more than 10 percent higher against the traditionally strong German mark than it had been a year earlier. The mark has been particularly weak over the past months. But even when the dollar's value is measured against a basket of currencies, including the extraordinarily strong British pound and the recovering Japanese yet, it has climbed by 3 percent over the last 12 months.
These figures give the lie to the view that the U.S. currency is endemically weak and, incidentally, to the suggestion by some Republicans that one aim of the new administration's policy should be to strengthen it. They do not necessarily mean that all is well on the foreign exchange markets, nor that the dollar will remain strong come what may.
Despite the absence of dollar crises this year, there has still been considerable instability on currency markets. In large part this is a reflection of the volatility in other financial markets. As U.S. interest rates soared during the early spring the dollar was in great demand. It climbed swiftly against other major currencies, peaking against the German mark at 1.98 to the dollar.
Foreign central bankers, who just a few months earlier were grumbling about the undermining effect on currency markets from rapid U.S. inflation, switched to complaints about tight U.S. credit and the pressures on them caused by a fast rising dollar. The latter was not even the main objective of the Administration's and Fed's policy, but was rather a side effect of the credit squeeze introduced to fight domestic inflation and inflationary expectations.
And as this squeeze was followed by the dramatic second-quarter recession, and plunging interest rates, so the currency markets changed tack too. The dollar lost much of its sudden strength, falling by a startling 10 percent against a trade weighted average of currencies in just the three months April to July.
The climb in the dollar's value since the summer has again been led by a jump in interest rates. Although this time around the Europeans are apparently keeping their complaints to themselves, the tightening up of U.S. money and concomitant strength in the U.S. currency is worrying them.
The German central bank has just announced a lower target range for the money supply next year although the country's five leading economic institutes last month criticised the central bank for its tight money policy and high interest rates. The economists said that the policy would lead to stagnation and higher unemployment next year. But the central bank prefers to take that risk than the one that the mark will be pushed down further.
There are some in the markets who believe that this winter will see a re-run of the spring seesaw in U.S. interest and exchange rates. Today's 17 3/4 percent prime rate is way above even the gloomiest forecasts of some weeks back. Although the market is now talking about a 20 percent prime, matching the April peak, few expect that level to be maintained for very long, or exceeded. Many of the major banks have accompanied their increasingly frequent announcements of a prime rate rise with the comment that they expect the rise to be only temporary.
It is quite possible both that when rates peak they will fall very sharply, mirroring on the downside the rapid upwards spiral, and that the peak will come soon.A sudden drop in interest rates would almost certainly knock some of the stuffing out of the dollar.
But it seems less likely that there will be a fundamental weakening in the dollar next year. Its recent relative strength has not been a fluke. Tight money and high interest rates have been part of the reason.
A shift in the nation's trading performance and balance of payments, and the state of the world economy have also been important. A foreign exchange dealer for the New York office of Credit Industriel -- a large Swiss bank -- said that this bank expects the dollar to reach 2 Deutche marks early next year and to be buoyed up both by a forecase surplus on the current account of the balance of payments and by continuing relatively high interest rates.
In today's world, a current account surplus or deficit is often not the main influence on major currencies. Large shifts in exchange rates, particularly in that of the dollar, occur for other reasons, such as a change in interest rate differentials or a shift in international investors' currency portfolios for long-term reasons. But even so, the balance of payments can have an important effect.
The gaping U.S. payments deficit in 1977, and the prospect of further large deficits, was a major factor in setting off the run on the dollar which culminated in a major rescue package in November 1978. The direct effect of the deficit on currency flows was swamped by capital movements as Opec and other investors tried to diversify out of dollars.
But just as the deficit was an underlying drain, so the subsequent turnaround in the balance of payments position has given an underlying firmness to the dollar. The big rise in oil prices a year ago dashed the chances of a current account surplus this year.
But while other oil importing countries, most notably Germany, have gone into substantial deficit, the recession and underlying improvement in the trend of imports and exports have limited the U.S. dip into the red. That has been a major reason for the change in the dollar-Deutsche mark relationship.
The $2.7 billion third-quarter deficit in U.S. merchandise trade was the lowest since the middle of 1976. The dollar's fall in 1977 and 1978 made U.S. goods more competitive, notwithstanding the problems of the auto industry, and this has helped improve trading performance. As other industrialized countries move into recession next year their demand for U.S. goods may lessen. But continued sluggishness in the U.S. economy will keep the lid on U.S. imports, and forecasters expect continued improvement in the balance of payments next year.
Rapid growth in the money supply since the summer and vigorous attempts by the Fed to slow this down have contributed to the swift tightening of credit markets in the last few weeks and soaring interest rates. Economists expect the jump in interest rates to slow down the economic recovery which is underway. This will relieve the pressure on the money supply to some extent anyway.
There is also some puzzlement in the Fed about why money growth has been so strong since the summer, and a belief that the trend will flatten out very soon.
But even if the recovery does peter out, and money growth slows down, interest rates will probably stay high in nominal terms next year. The Fed's targets for money growth next year are pitched at -- or just below -- the likely rate of inflation. It will take high interest rates to keep those targets, even if they are not having to finance much real growth on top of inflation.
Bankers Morgan Guaranty warn in their latest World Financial Markets survey that the dollar could weaken next year unless the new administration shows quickly that it is determined to fight inflation. In theory, relative inflation rates have a critical impact on currency values and movements.
But the practice of the last few years of floating exchange rates has shown that this link can be tenuous. High-inflation Britain, as well as relatively high-inflation America, has had a stronger currency over the last two years than low-inflation Germany.