US dollar's surge earns mixed reviews from economists; It helps keep inflation down, but chips away at export-related jobs
Washington — The United States dollar's recent surge in value against foreign currencies is prompting American tourists to dust off travel guides that promised they could enjoy Europe on $10 a day.
The dollar hit a record high against the currencies of 15 major trading nations Monday, according to Morgan Guaranty Trust Company calculations, and was 24.2 percent above its average level in the 1980-82 period. The dollar then eased on major European currency exchanges Tuesday to a level 23.8 percent above the '80-82 base period.
Currency forecasters expect the dollar to remain strong and perhaps climb a bit more in 1984, then decline in 1985.
The dollar's value affects Americans in a variety of ways, even if they plan to travel no farther than the corner grocery store. Lower domestic inflation is perhaps the largest benefit.
''The strong dollar is reducing the prices of goods and services purchased abroad,'' directly affecting the US inflation rate, says Allen Sinai, chief economist at Shearson Lehman/American Express Inc. ''Inflation is also being limited by the dollar-induced weakness in net exports, which limits demand pressures on prices.''
But a strong dollar has a variety of economic drawbacks as well. It makes it more difficult for US firms to sell goods overseas, thus reducing the number of job openings in the US. This year the US trade deficit, the gap between what the US sells overseas and what it imports, is expected to hit a record $120 billion. Each $1 billion in that deficit represents 25,000 US jobs either lost or not created, the Commerce Department estimates.
A robust dollar also spells trouble for people who have invested in gold: Gold prices tend to move in the opposite direction as the dollar. The high interest rates that keep the value of the dollar high make it more attractive for potential gold investors ''to stay with interest bearing investments,'' says Bette Raptopoulos, senior metals analyst for Prudential Bache Securities Inc.
She says gold may drop to as low as $310 an ounce this year compared with a $ 346 opening fix in London on Tuesday before rebounding later.
The stronger dollar also makes it more difficult for third-world nations to pay their debts because many of the debts are expressed in dollars.
One reason for the recent increase in the dollar's value is that investors think the Federal Reserve Board soon may boost its discount rate from the current 9-percent level in a bid to slow the pace of economic growth. The discount rate is the interest rate charged member banks for borrowing from the Fed. A change in the discount rate could come at a meeting the Fed has scheduled for July 16 and 17, at which it will review monetary policy objectives for 1984 and set preliminary money supply targets for 1985.
A higher discount rate could lead to upward pressure on other US interest rates. An increase in interest rates would make the US a more attractive place for foreigners to invest. That would increase the demand for dollars and thus put upward pressure on the dollar's value.
''The dollar will stay strong up to the (Fed's) meeting in anticipation of a possible increase in the discount rate,'' says William Schwarz, vice-president at Manufacturers Hanover Trust Company.
''We are still bullish on the dollar,'' adds Jonathan Francis, director of currency forecasting at Wharton Econometric Forecasting Associates. By year end 1984, he expects the dollar to be 7.2 percent higher against nine major trading currencies than it was at the end of 1983. About five percentage points of that gain already have taken place, he says.
The end of the dollar's run-up could be in sight. Mr. Francis expects a modest 3.5 percent decline in the dollar in 1985 as the gap between US and European interest rates narrows. Ronald Liesching, vice-president of Chase Capital Markets counters that ''the risks are that the dollar does move higher in the second half of 1984 and then collapses (perhaps) early next year.''
A collapse could occur, he says, when the gap between US and European interest rates narrows as European economies gain speed while the US economy slows. Investors who had borrowed funds at bargain interest rates in Europe for reinvestment in dollar-denominated assets would be squeezed as European rates rose and forced them to liquidate their dollar holdings.