Buck Dive: Not a Total Bellyflop

By , Staff writer of The Christian Science Monitor

TAKESHI KASAI, a student from suburban Tokyo walks down Fifth Avenue loaded with shopping bags from Burberrys, the Gap, and Levi Strauss. Told the Japanese yen is stronger, he smiles.

Yes, he agrees, it could make New York shopping even cheaper. But, he quickly adds, ``It's not too good for Japan.''

The currency turmoil - with a super strong yen and German mark -

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may mean better buys for Mr. Kesai.

It could mean higher prices on some imported goods from Japan or Germany for American shoppers. But in the case of goods from Canada and Mexico, which have also seen their currencies drop in value, buyers in the United States may find bargains.

Federal Reserve Chairman Alan Greenspan told Congress yesterday that the dollar's decline against some currencies was ``unwelcome and troublesome.''

It has the potential, he said, to increase inflationary pressure on the US economy. In his prepared remarks, Mr. Greenspan made no mention of the possibility that the Fed was close to the end of its string of hikes in short-term interest rates. Some observers blamed earlier hints by Greenspan of a shift to easier credit down the road for the bubbling in foreign exchange markets.

The day before, US Treasury Secretary Robert Rubin repeated that a strong dollar was in the US national interest.

The weak dollar will certainly make trips more expensive for tourists and business people visiting German or Japan. For example, a room at the Ramada Garni Nordwestzen in Frankfurt costs 156 marks ($116.79) per night. Last fall, the same room would have cost $97.50 because the dollar was worth more. The same is true in Tokyo where a 40,000 yen hotel room at the Westin would have cost $392.16 at year-end, but costs $454.54 today.

On US shores, the effects of the falling dollar are harder to quantify. Oil imports, for example, are mostly priced in US dollars. However, Saudi Arabia has reportedly put a higher dollar price on some of its oil exports to offset the decline in the value of the dollar. Silk ties from Italy are unlikely to rise in price either since the lira has been falling in value as well. But, the prices of such cars as Hondas and Toyotas may rise slightly since 30 to 40 percent of their content originates in Japan.

The weak dollar is also starting to do some damage to the US financial markets. Foreign investors in these markets influence prices. When the dollar falls sharply, these investors can see the value of their assets decline dramatically and may head for the exit.

THIS happened on Tuesday when the Dow Jones industrial average fell 34.93. If the stock and bond markets were to continue to fall sharply, the damage on Wall Street could potentially spread to Main Street. Prices, however, were bouncing back a bit early yesterday.

``You can get an indirect feed from the markets to the real economy,'' says Marina Whitman, an economist at the University of Michigan in Ann Arbor.

Some economists say most of the decline in the dollar has taken place and the currency may even rally in the near future. Yesterday in Tokyo, the dollar got as low as 88.90 yen in Japan and 136 marks in Germany. But the US currency was somewhat higher in European trading after the German central bank said the dollar's decline was not justified.

Although the financial markets are jittery now, economists point out that the declining dollar will have both long-term costs and benefits in the world economy.

For example, the $66 billion US trade deficit with Japan is likely to come down as US goods become cheaper and Japanese goods more expensive. The Clinton administration has been trying to achieve a better balance for the past two years.

The export slowdown, however, will come at a bad time for the Japanese economy. The Japanese are still trying to cope with the post-earthquake expense to rebuild Kobe.

``The Japanese need exports to help them since their economy is doing so badly,'' says Peter D'Antonio, senior economist at Citibank. With the yen at this level, he says, Japan ``will have some troubles.''

US attempts to stabilize the currency have failed so far and the Treasury appears to be waiting for the selling to tail off.

``Historically, central banks do not have a good track record intervening in the currency markets,'' says Charles Plosser, dean of the William Simon Graduate School of Business at the University of Rochester. He says the Fed shouldn't waste money trying to stabilize the dollar but should focus ``on the things we need, such as promoting savings, low inflation, and sustained growth.''

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