The dollar continued to slide in foreign exchange markets yesterday, prompting economists and traders to question whether a major downward move -- or even a collapse of the dollar -- is in the making.
The dollar dipped further below the 3.00-mark level yesterday, closing at 2.9625 in New York, down from 2.9730. The British pound, responding to high interest rates and an improving economic performance, climbed to $1.3681 in New York, its highest level in a year. The dollar was lower against most other currencies as well, including the Japanese yen, falling in New York to 244.32 yen from 245.82 on Monday.
The dollar had hit a peak, after a long and extraordinary climb, of 3.47 marks on Feb. 26. On that same date, the British pound had slipped to $1.04.
The dollar's new weakness, after it held fairly steady during the prior two months, was generally attributed to a perception -- based on recent economic indicators -- that the U.S. economy has weakened significantly, and that the Federal Reserve Board will act to push interest rates, already down substantially from last year, even lower.
A major downward drift in the dollar could have important economic consequences for the United States and its trading partners. The enormous surge of the dollar in the past two years -- to the point where many judge it to be overvalued by at least 40 percent -- is one of the major causes of the huge American trade deficit, and the inability of American manufacturers to compete abroad.
Over time, a significant fall in the dollar would reduce the trade deficit and give a boost to economic growth, most observers say.
On the other hand, a falling dollar would make foreign goods more expensive, and thus could contribute to a new inflationary trend. An accompanying fall-off in capital flows would also make it more difficult to finance the U.S. budget deficit.
But foreign exchange market experts remain divided among those who see a "hard landing" for the dollar, with the rate plunging to about 2.70 West German marks within about a month, and those who see some slippage but no collapse.
Henry Kaufman, chief economist of Salomon Bros. in New York, said in a telephone interview, "I do not believe this means the demise of the dollar -- there haven't been big, fundamental changes. But there is a downward drift in exchange markets and it is not discouraged by American monetary policy."
Geoffrey Bell, head of the New York investment company of the same name, agreed. "I don't envision a 'hard landing' or any kind of great fall in the dollar," he said.
Bell argued that, in the first place, anxieties about the health of the U.S. economy may be exaggerated. "And in any case," he said, "if you look around the world, there still is the question of where else you put the money."
Both Bell and former Treasury assistant secretary C. Fred Bergsten said that a collapse of the dollar can't occur without a "stampede" of American investors into another currency. And they say that except for the British pound -- which is not considered a major alternative -- there is no attractive option for dollar investments.
Bergsten said that the dollar could behave somewhat erratically, moving up "if the next batch of economic indicators looks a little more positive. But as I've said before, the weight of the trade deficit eventually will bring the dollar down."
But others argue that a declining dollar trend already has set in, and that the market psychology could give it a life of its own.
"If people decide it's a trend, we'll see many more corporations coming into the market and taking new positions," said James Vick, chief corporate dealer for Crocker Bank International in New York.
Another dealer, at a European Bank in New York, said that many traders are "jumping on the bandwagon."
Kaufman made the point that financial markets believe the Federal Reserve is now tilting toward reflationary, rather than anti-inflationary policies, "which could mean that we are at the low end of the inflation cycle in the United States."
At the same time, some economic improvement in Europe, coupled with a slackening of the U.S. growth rate, has narrowed the differences that had been favoring the dollar, he said. A more subtle influence may be questions about the future course of Federal Reserve policy, touched off by the resignation of Gov. Lyle Gramley and the probable replacement next year of Gov. Charles Partee, Kaufman said.