Treasury Undersecretary Beryl Sprinkel said bluntly yesterday that "the evidence doesn't support the view" of Martin S. Feldstein, chairman of the president's Council of Economic Advisers, that the primary cause of an overvalued dollar is high real interest rates triggered by large budget deficits.
Sprinkel acknowledged that the dollar is "strong," with an adverse impact on the ability of American manufacturers to compete in world export markets. But, he added, "I am not sympathetic to the view that the value of the dollar is 'too high,' or that the dollar is overvalued."
He suggested that the dollar may never again be as weak as it was in late 1978 at a time of poor inflation control, and a loss of confidence in dollar assets--which nonetheless gave American goods a competitive edge. "If we conduct our affairs properly, if we keep inflation under control, we may not be that competitive again," Sprinkel said.
Without mentioning Feldstein by name, Sprinkel rejected the economic adviser's entire analysis of the linkage between the federal budget deficit, high interest rates, and trade deficits as "misleading" and "nearsighted."
He outlined other causes for the dollar's strength over the past few years, and predicted there would be more stable exchange-rate relationships in the next year as the U.S. current account (trade and services) soars to perhaps $80 billion or more in 1984, with little further progress made on the inflation front.
Sprinkel noted that since early August, the dollar had already depreciated 6 percent against the Japanese yen and 5 percent against the German mark, because some of the factors creating the earlier strength are no longer present.
"On the basis of economic fundamentals--real growth, inflation, trade and current account balances--there appears to be little prospect of further upward pressure on the dollar over the next year or so," Sprinkel told a joint session of two House banking subcommittees.
"So long as other major countries remain as firmly committed to anti-inflationary policies as we are, there will be a clear convergence of policies and performance among the major countries. Exchange rates can be expected to reflect this convergence through greater stability."
Sprinkel conceded that budget deficits should be reduced, not because they affect the dollar, but because they interfere with capital formation.