Dollar decline raises new concern for US

Twelve months ago, the worry about the US dollar was that it was "too strong" - complicating life for US manufacturers hoping to export their products overseas.

Now, after several months of sustained declines, a different worry is popping up: that the dollar could plunge too far.

The falling currency could affect everything from Americans' ability to vacation in Paris to more basic concerns such as inflation and interest rates at home.

Last week, the dollar hit new lows against the euro. It set a three-year low against the Japanese yen. Few experts see the slide, in itself, as worrisome. The danger would be if it gathers momentum.

"The odds of a hard landing in the dollar are rising," notes Stephen Roach, chief economist of Morgan Stanley, a New York investment bank.

One driving factor is the magnitude of US debts - and the reliance on foreign money to finance them.

If foreign investors become less eager to hold dollars, the US Treasury could face pressure to pay higher interest rates on US debt, for example. Those foreign investors, having lost billions on paper this year, appear edgy about holding US stocks, bonds, and business properties. In September, the inflows into dollar-based assets totaled only $4.2 billion. That's far short of the $64 billion average monthly inflow in the first eight months of the year.

To many experts, some decline in the dollar is warranted. The greenback has declined about 10 percent this year, by one broad index. This drop has started to encourage American exports. And, by pushing up the cost of imports, it may prompt some narrowing of the US trade deficit, which stands at a record level.

The deficit in trade and other international payments, known as the current account, is running at $555 billion. That amounts to 5.1 percent of the nation's total economic output - a level many economists believe can trigger an international payments crisis.

The debate now is whether such a crisis could happen. Federal Reserve Chairman Alan Greenspan last week talked of a higher probability of a "benign resolution to the US current account imbalance."

The US has low interest rates, low inflation, and excess capacity in industry. That may help the economy sustain some dollar-related upward pressure on interest rates and prices. "This is the optimal time to achieve the inevitable dollar correction," says C. Fred Bergsten, president of the Institute for International Economics in Washington.

What concerns economists is that a sharp shift in sentiment among foreign investors and foreign central bankers could produce a sudden outflow of money from the US. "Were that to happen, it would be a catastrophe," says Criton Zoakos, president of Leto Research, a financial research firm in Leesburg, Va.

As he sees it, inflation and interest rates would rise in the US. Even worse, Japan would return to a recession and Europe would fall into the economic dumps, causing some political turbulence. China's exports would slump, forcing millions of Chinese to return to their farms.

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