CONSPICUOUS on the short list of things that are currently going well, there is the U.S. dollar. Last fall, the dollar was drowning in a sea of yen, marks and francs. The Carter administration organized a rescue that has been a considerable success, and now the dollar floats merrily along, even rising a little.
The international currency markets are dominated by people gambling on future values. That makes them exquisitely sensitive to impressions of governments' intentions. The first phase of the administration's rescue operation was to stop talking as though it was ready to tolerate the dollar's steady decline abroad and higher inflation at home. But there's more than that to the dollar's present stability. For several years the United States has been buying a great deal more abroad than it has been able to sell, and those vast deficits have exerted heavy pressure downward on the exchange rate. But now those deficits are declining.
The reason? It's a textbook example of the exchange-rate mechanism. The dollar began to decline at the end of 1977, and the effects on trade are now showing up. That decline makes American goods more competitive - that is, cheaper - abroad, and it makes foreign goods more expensive here. The volume of American exports was up sharply last winter compared with a year earlier, but imports have hardly changed at all. That improves the trade balance, which in turn keeps the dollar from sinking further. The system is working, more or less automatically, as it is supposed to. But this process of adjustment is not free of cost. The lower value of the dollar, compared with two years ago, leaves the inflation rate a little higher, and Americans a little less prosperous, than they would otherwise be.
For the future, there's a relationship between the dollar's value and the economy's growth rate. At present the economy is not growing very fast. That limits the American demand for imports. In contrast, the Japanese economy is expanding rapidly and, in fact, last month the famous surplus in the Japanese current account dropped briefly to zero. Growth drove Japanese imports up, and the yen down a little.
As the U.S. economy slows down later this year and perhaps falls into recession, a lot of people are going to expect the government to start cranking once more to make it run faster. But too much cranking threatens to start the dollar falling again on the international exchanges. The stability of the dollar is impressive, but experience suggests that it is also highly conditional.