The dollar yesterday continued its steady, but orderly, slide in global markets, closing at the end of trading in Europe at the lowest level against the German mark since the end of World War II.
Experts said that the dollar's weakness is the direct result of general economic malaise in the United States and higher interest rates in Japan and Europe that are attracting investment there. The trading also reflects widely held expectations that the Federal Reserve Board will soon lower short-term U.S. rates even further to fight an incipient recession.
"The best thing that could happen now for the United States," said foreign exchange expert Geoffrey Bell of the New York company bearing his name, "is a falling dollar that would work against recession by improving exports and reducing imports."
At the close of trading in Europe, the dollar was down to 1.5605 marks, compared with 1.5685 on Tuesday. Trading in New York hit a low of 1.5540 before rebounding slightly to close at 1.5660. Against the yen, the dollar also retreated, closing at 147.65 yen in New York, down from 148.85 the day before.
Government officials have shown little concern over the dollar's recent weakness, and there were no signs of intervention in the currency market by the United States or any of its economic partners in the so-called Group of Seven industrial nations. On the contrary, a number of experts argue that a declining dollar -- which foreshadows the probability of lower interest rates -- is the preferred medicine for the declining American economy.
New York economist Henry Kaufman said yesterday that the drop in the dollar's value comes not because of the crisis in the Persian Gulf, but in spite of it. The United States, he said, "is no longer viewed as the same kind of safe haven as it was in the 1970s," when often, despite transitory economic weakness, investors were lured to the dollar at a time of international crisis.
Now, Kaufman pointed out, the perception in the exchange and financial markets is that there is greater economic stability in Europe, scheduled to be reinforced as the 12 Common Market countries transform themselves into a single market in 1992. And although Japan is more vulnerable to an oil shortage than the United States, it remains an economic powerhouse.
Because investors have the ability to spread their risk through "multiple save havens," the course of the dollar reflects the purely underlying economic conditions, undiluted by political considerations. And those conditions now indicate a weak dollar.
However, most experts agreed yesterday that if a shooting war developed in the Persian Gulf, the old "safe haven" principle might take hold, at least temporarily, driving the dollar up while investors and speculators awaited the outcome.
Kaufman ticked off the economic factors weighing down the dollar, among them the seeming intractability of the federal budget deficit, and, ironically, a fear that any tax increases imposed to solve it would come "at a time when we're teetering toward recession." At the same time, banks and other financial institutions are weak, the real estate market is under pressure and corporations have taken on what many regard as excessive debt.
Analysts were in agreement yesterday that so long as stalemate persist in the gulf, the dollar is likely to be pulled down further by the higher interest rate pattern in Europe and Japan. A 10-year U.S Treasury bond yesterday was yielding 8.67 percent, while the equivalent German note was paying 8.77 percent, providing sufficient incentive for investors to sell their dollars, buy marks and invest in the German bonds and notes. And while the Japanese equivalent yielded only 7.875 percent, the run-up in Japanese rates has recently been the steepest, jumping more than 2 percentage points in the past year, compared to a 1.5-point climb in German yields.
The calm view of the current dollar decline contrasted sharply with the massive intervention by the Group of Seven in early 1988, when the dollar sank to its previous post-war record low of 1.5615 marks. But the situation then was different: The main concern -- just a few months after the October 1987 stock market crash -- was that a free-falling dollar would trigger inflation, forcing the Fed into high interest rates that would crunch the economy.
Today, the main concern is recession, rather than inflation, despite the rise in oil prices. Moreover, the dollar decline is more of a steady downward drip, rather than a cascading fall as in 1988. An additional factor in making Washington hesitant to intervene to bolster the dollar may be criticism of the process leveled by some members of the Federal Reserve's Open Market Committee who believe that intervention -- buying and selling currencies in the private market -- is a costly, and often fruitless, way to adjust currency rates. But carrying greater weight is the conviction of the Group of Seven policy makers that intervention in the present circumstance just wouldn't work.