The dollar has been in a long slide in foreign-exchange markets for eight months. Given that the United States has lost the cachet of being a "safe haven" for investors, the greenback could move even lower.
Yet the dollar's decline is not resisted by the Bush administration. And except for angst on the part of the French government, it is also viewed as a ho-hum event by almost all others of the Group of Seven industrial powers.
Privately, Treasury officials welcome the weak dollar as a spur to exports. They know that a stimulus derived from export sales could prove to be one of the few counter-recessionary tools available to the United States in 1991.
The time-honored belief in financial markets used to be that the United States, especially at a time of military crisis, represented a "safe haven" for foreign investors. The Iraqi invasion of Kuwait, however, did not reverse a dollar decline underway since April. (A shooting war, experts say, could yet bring some strength to the dollar.)
The Bush administration rejects the view that the dollar situation is serious, citing the decline as "orderly." In fact, Treasury officials assert that given uncertainties in the Gulf and volatility in other markets, foreign-exchange rates represent an oasis of relative stability.
Despite the fact that Treasury chief Nicholas Brady is reportedly comfortable with the dollar level, a weak national currency can't be counted an unadulterated blessing. The same dynamic that stimulates American exports by making them cheaper boosts the price of imports by making them more expensive, adding an inflation threat.
At various times in the past five years, a steadily declining dollar would have triggered hurry-up sessions of the G-7 finance ministers and central bankers. There would be solemn pledges in concluding communiques that they would intervene in markets -- that is, buy up dollars -- to ensure "stability" of exchange rates.
Only French Finance Minister Pierre Beregovoy has argued publicly that the G-7 should get together quickly to do something about the dollar decline. What worries Beregovoy is that a further decline will be costly in terms of lost French merchandise exports to the United States, and in third markets.
There is also some support within the Japanese Ministry of Finance for renewed intervention to stop the decline of the dollar at the record low of 120 yen set in January of 1988. But elsewhere -- including at the top of the Bank of Japan -- there doesn't seem to be a sense of urgency, in part because officials recognize that their ability to turn things around is severely limited.
As David Hale of Kemper Financial Services observes, the Japanese central bank, giving priority to domestic over international needs, is pursuing a high-interest rate policy, while the United States, facing recession, is leaning the other way. With interest-rate differentials between Japan and the United States still widening, intervention to prop up the dollar would be a contradictory and probably unsuccessful maneuver.
The dollar has dropped about 20 percent against the Japanese yen since hitting a high for the year of 160 yen on April 2. At 128 yen this week, the dollar is nearing that all-time low of 120 yen. And the dollar has plunged 13 percent to 1.48 German marks, the lowest level in the post-World War II era.
Beregovoy could be too worried -- and Brady too hopeful -- about the impact of a further dollar decline on trade balances. The Plaza Accord of 1985, sanctioning a decline of the dollar as a strategy to reduce America's trade deficit, did not prove to be a cure-all.
At a recent conference at the Institute for International Economics in Washington, Stephen Marris, author of a celebrated essay titled "Deficits and the Dollar," conceded that after the famed Plaza deal -- designed to devalue the dollar while boosting the value of other major currencies -- the actual reduction in the trade deficit was about 30 percent less than he and other economists had predicted. That raises the question of whether a further decline of the dollar will do as much for American exports as the Bush/Brady people hope.
Moreover, some analysts question the overall benefits of the Plaza Accord, whose defenders claim that the U.S. trade deficit might have hit $300 billion a year without it. Critics contend with some justification that the Plaza Accord -- even if it deflected protectionist legislation, one of former Treasury secretary James A. Baker III's main aims -- also gave Japan the best of all worlds. The accord enabled Japan to acquire an investment foothold in America without significantly reducing its trade surplus with the United States.
By extension, critics argue that American policy makers should think twice before accepting a significant additional decline in the dollar for short-term -- that is to say, 1991 -- economic and political objectives.