Reagan under growing pressure to close a widening trade gap. Lawmakers keep eye on exchange-rate meeting

The US dollar is taking another roller-coaster ride in world currency markets. The greenback's recent plunge comes as finance ministers from 11 industrialized nations gather today in Tokyo to find ways to make the swings in currency values less wrenching for the world economy.

Experts remain skeptical about the meeting's chance for success.

Congress will be watching the meeting's outcome. Legislators are increasing pressure on the White House to curb the massive United States trade deficit and to whittle down the strong dollar, which has helped widen the gap between US exports and imports.

``The administration must either design an approach to reverse our trade deficit by reducing the value of the dollar and breaking down foreign barriers, or it must face the almost-certain prospect that Congress will capitulate to business and labor and levy heavy restrictions on imports,'' warns the House Ways and Means Committee chairman, Rep. Dan Rostenkowski (D) of Illinois.

The dollar dropped sharply Tuesday and Wednesday against all major currencies, following news that US banks were cutting their prime, or benchmark, lending rates. The widespread expectation that the Federal Reserve Board would cut its discount rate also helped feed the decline. The discount rate, currently 7.5 percent, is the fee that regional Federal Reserve banks charge qualified financial institutions for funds they borrow.

Lower US interest rates make dollar-denominated investments less attractive. As a result, fewer foreign investors want to buy dollars, and the dollar's price relative to other currencies tends to fall.

In early trading Wednesday the British pound rose to a 10-month high of $1.3132. In Germany the dollar was quoted at 3.009 marks, and in Tokyo the dollar was quoted at 246.95 yen.

Changes in currency markets are notoriously difficult to predict. But several observers do not expect the dollar to go into a free fall.

``I would not expect a collapse of the dollar in, say, over the next 12 or 18 months,'' Sidney L. Jones, undersecretary of commerce for economic affairs, said yesterday.

Data Resources Inc., a forecasting firm, estimates that for a variety of reasons, the dollar will fall 10 percent by the end of 1985 from its peak in the first quarter of the year on a trade-weighted basis. But ``that would still leave the dollar in 1986 stronger than it was in 1983,'' says DRI's forecasting chief, Roger Brinner.

And since purchases of imported goods respond to exchange-rate changes only with a lag, the US trade deficit is expected to get worse before it gets better.

In the first three months of 1985, the trade deficit was $30 billion when measured on the broadest or current-account basis, the government reported this week.

If that pace continued, the trade deficit for 1985 as whole would be $120 billion, compared with last year's record $101.6 billion.

The deficit represents jobs lost or not created in the US, especially in the manufacturing sector. So Congress is at work on what it sees as legislative remedies.

For example, Sen. Lloyd Bentsen (D) of Texas and Rep. Richard A. Gephardt (D) of Missouri expect shortly to introduce a measure slapping a 20 percent tariff on all imports from Japan, unless that nation can show by a declining trade surplus with the rest of the world that its markets have been opened.

Against this politically charged background, US Treasury Secretary James A. Baker III and his counterparts from 10 industrialized nations meet Friday, with their deputies slated to meet today.

The participants are expected to agree to a plan calling for greater surveillance of their economic policies. The International Monetary Fund (IMF) would prepare the surveillance reports, and the finance ministers would meet to discuss the documents before they were published. The goal is to foster greater stablility in currency relationships by ensuring that policies likely to cause currency swings would be subject to discussion.

But most experts say this would have only a small impact on the currency gyrations.

At best the agreement is ``a modest initial step in the direction of forcing nations to take into account external economic influences in determining domestic policies,'' says William Cline, senior fellow at the Institute for International Economics.

Lawrence Krause, senior fellow at the Brookings Institution, says the surveillance procedure is unlikely to prevent the adoption of policies that cause currency swings. He cites high US budget deficits, coupled with tight monetary policy, which many analysts say prompted the dollar to soar.

But a surveillance plan ``would be very useful'' ammunition for arguing, within a country's own political arena, for changing the offending policies, Mr. Krause says.

You've read  of  free articles. Subscribe to continue.
QR Code to Reagan under growing pressure to close a widening trade gap. Lawmakers keep eye on exchange-rate meeting
Read this article in
https://www.csmonitor.com/1985/0620/aswing.html
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe