THE STRONG DOLLAR is a compliment that the rest of the world is currently paying to the United States--but an expensive and inconvenient compliment. As the dollar rises against other major currencies, the prices of American exports rise abroad and foreign imports become more competitive than ever.
Governments here and abroad say that they are intervening in the market--meaning that they are selling dollars to restrain the dollar's rise, and buying other currencies to bid them up. That kind of operation is useful to damp down fluctuations in the rates and to make the speculators' games a little more risky for them. But it won't have much effect on the basic alignments of the currencies.
There was a time when governments could hold rates pretty much where they pleased, but those days are gone forever. Money now moves across borders in such volumes, and with such speed, that no government has the resources to offset it. The rates are being set by much deeper forces.
One of them is the impression, widespread around the world, that the United States is a safer place than most to park money. Another is the forecast of a promising recovery of the economy here. After a year of repeated debt and currency crises in Latin America, and predictions of weak growth and rising unemployment in Europe, a lot of people abroad have been moving their wealth to the United States. That tends to push the dollar up, and there's not much that the United States can--or ought to try--to do about it.
But the strong dollar has other causes that ought to be of real concern to Americans. They arise from the federal government's gigantic budget deficit. The most recent rise in the dollar's international value is apparently related to the very large borrowing operations that the Treasury has been conducting as it proceeds to finance the rapidly rising debt. The federal deficit is pushing up interest rates, and the interest rates attract funds from abroad. Foreigners sell their own currencies--yen, or deutschemarks, or whatever--and buy dollars. That bids up the price of the dollar in the continuous auctions that go on in the trading rooms of the big international banks.
It would be nice to think that someone in the government might somehow, by pulling invisible wires, manipulate the market and force those interest and exchange rates down silently and painlessly. Unfortunately, that's not possible. Intervention isn't capable of it. The only remedy likely to make much difference is reducing the federal deficit. Until that happens, interest and exchange rates will continue to cast a shadow over the recovery of the economy.