Remember the laughably lame euro, the new currency of a united Europe whose swift plunge on foreign exchange markets humiliated its continental backers?

Well, that was last month's story. The buzz now in global financial markets concerns the suddenly slumping U.S. dollar, which has dropped sharply in recent weeks against both the euro and the Japanese yen. The decline is stirring unease about the potential for a stampede by foreign investors from American stocks and bonds, which could terminate the U.S. expansion and destabilize the world economy.

Yesterday, the dollar's decline against the yen elicited high-level official comment from both sides of the Pacific, arousing speculation that major governments might be considering intervening in currency markets by buying the greenback to keep it from skidding further.

In Tokyo, the government announced that Finance Minister Kiichi Miyazawa had spoken by phone with Treasury Secretary Lawrence H. Summers about their nations' economies and currencies. "We have agreed sudden changes [in exchange rates] are undesirable," Miyazawa told the parliament. "If necessary, we must respond." He also said it "wasn't good" that the exchange rate had dipped to the 113-yen-per-dollar range on Monday, from around 122 in mid-July.

But the U.S. Treasury, which is leery about the effectiveness of government intervention in currency markets, used much more cautious language than Miyazawa, issuing a statement simply acknowledging that the two men had talked about exchange rates and would "keep in close touch." The dollar ended the day higher--though up only about 1 yen up from the previous day, changing hands at 115.29 yen at the close of trading in New York.

Despite the Treasury's reticence, many experts believe U.S. economic policymakers must be concerned that the slide in the dollar could turn into a rout.

"If this administration's thinking about what can go wrong in the next 18 months, the dollar has got to be pretty high on the list," said David Gilmore, a partner at Foreign Exchange Analytics, an Essex, Conn., firm, adding in a reference to the presidential aspirations of the vice president: "It could be make or break for Gore."

"This is the number one threat to the continued expansion of the economy," agreed C. Fred Bergsten, director of the Institute for International Economics.

The problem starts with the U.S. trade deficit, which hit a record $164 billion last year and is headed above $200 billion this year as the booming U.S. economy sucks in massive amounts of imports, and slumping overseas markets absorb fewer exports from American firms.

By itself, the trade deficit poses little danger as long as foreigners are willing to take U.S. dollars in exchange for their products, and invest those greenbacks in U.S. stocks and bonds. But the longer they keep loading up on such assets, the greater the risk that they may suddenly dump them en masse. If that happens, the resulting tumble in stock prices could deal a severe blow to U.S. consumer confidence, and the collapse in bonds would send U.S. interest rates soaring.

In recent weeks, Japanese officials have been by far the most exercised about what is happening in currency markets. The Finance Ministry is worried that a strong yen could abort Japan's fledgling recovery because the higher the yen rises, the more Japanese exports lose competitiveness to products from other countries.

The ministry has intervened heavily, selling billions of dollars' worth of yen in a mostly futile effort to brake the currency's rise. That strategy drew a rebuke from Summers, who warned Tokyo last month against trying to "manipulate currencies" instead of stimulating its economy.

In their statements yesterday, Japanese officials suggested that Washington was now ready to lend its formidable muscle and credibility to a joint intervention because the movement in the dollar-yen rate has begun to pose a problem for the United States as well as Japan.

But the Treasury statement suggested that it is inclined to keep its powder dry at least for a while--presumably, experts said, a reflection of the agency's longstanding view that intervention should be used sparingly because of the likelihood that government war chests will be overwhelmed by markets.

The Treasury statement was "noncommittal," said Daniel Tarullo, a former international economics adviser for the Clinton White House who is now at Georgetown University. "It appears carefully designed to neither embrace nor reject the possibility of intervention."

In important ways, the dollar's decline may prove beneficial, provided it is gradual. A weaker greenback would help reduce the U.S. trade deficit to manageable proportions by making U.S. exports more competitive. Moreover, the dollar is dropping because of welcome develop- ments--the recent signs of economic strength in Japan and Europe, which is attracting investors to the euro and the yen.

"The world has owned the U.S. stock market and the U.S. bond market for the last five years, and made a lot of money at it, but now people are beginning to move out of the U.S. and into Japanese and European markets," said Richard Medley, who runs Medley Global Advisors, a New York-based firm that counsels large international investors. "But as they do, the chances increase that the rush out of the dollar will accelerate, and that's what could eventually become a tipping point into a crisis. Right now we haven't seen that, but that's where we are."


(This graphic was not available)