If five major nations succeed with their plan to lower the value of the dollar, it would affect the average American in a variety of ways. The greenback took a record drop of nearly 5 percent in value Monday on word that the United States, France, Germany, Japan, and Britain -- the Group of Five -- had agreed on a plan to lower the dollar's high-flying ways. On Tuesday the dollar steadied in early trading.
If the dollar were to fall further, the number of jobs in export-related industries like farming and heavy-equipment manufacturing could increase, the nation's soaring trade deficit could shrink, and corporate profits and stock prices could rise.
On Monday the stock market reacted to the industrial nations' plan and its expected consequences on interest rates: The Dow Jones industrial average surged more than 18 points. At the time of this writing on Tuesday, prices were mixed in early trading.
A drop in the dollar could also involve penalties. These would likely including upward pressure on inflation, less attractive prices for overseas travel, and greater pressure on some developing countries and the US banks that have lent them money.
``The rise in the dollar has had an effect. Going the other way has to have an effect,'' says Lea Tyler, an economist at Chase Econometrics. Analysts say it will take at least a week or two to see if the Group of Five's plan is effective.
While some effects of a declining dollar will appear quickly, ``it takes a year or more normally 18 months'' for exchange-rate changes to show up fully in the nation's trade statistics, says William R. Cline, senior fellow at the Institute for International Economics.
And the outcome of a dollar decline is tougher to predict than in the past, says Robert Gough of Data Resources Inc. Predictions are complicated by changes in the international economic scene. These changes include increasing competition for sales of farm products and other traditional US export mainstays. Another complicating factor is the vastly larger size of worldwide currency trading, which totals $100 billion to $150 billion a day and makes government intervention in currency markets more difficu lt. Thus the magnitude of any given effect will depend on the size of the dollar's drop in value.
``The upshot here is that the analytical answers of the past do not necessarily apply entirely'' now, he says.
Given that caveat, the potential downside effects of a decline in the dollar could include:
Adding to inflationary pressures. As the dollar's value relative to foreign currencies drops, it drives up the price of imported goods sold in the US, since the dollar then purchases fewer units of the foreign currency used to buy the item from the overseas manufacturer. Higher prices for imports add to the US inflation rate and allow US producers of the same type of goods to boost their prices.
But several factors lessen the danger of inflation now. For one thing, the US inflation rate is relatively low now. The government announced Tuesday that consumer prices in August rose at a modest 0.2 percent seasonally adjusted annual rate. For the first eight months of the year the inflation rate has been 3.3 percent. Some economic forecasters are calling for a 3.3 percent rate for all of 1985, which would be the best inflation performance since 1967.
Analysts also note that foreign companies have enjoyed large profit margins, thanks to the dollar's strength. To keep their share of the US market, they could ``maintain US prices quite comfortably by shrinking profit margins,'' Chase analyst Tyler says.
The inflation outlook is also helped because Saudi Arabia's King Fahd announced this week that his nation was prepared to nearly double its oil production, a move most experts say would push down world oil prices.
Pushing up the cost of foreign travel for American tourists.
The positive effects of a declining dollar could include:
Benefiting to some extent the developing nations, whose dollar-denominated debts would be less burdensome. But a lower dollar would also make life more difficult for developing nations like Mexico that sell oil, which is priced in dollars. These nations' financial woes could affect the US banks that have lent them money.
Adding to the number of jobs in industries such as farming, semiconductors, and heavy-equipment manufacturing, which try to sell products abroad and have been hampered by the high dollar.
Helping boost profits and perhaps stock prices for companies that do business overseas. They must translate their foreign earnings into dollars for reporting purposes.
When the dollar is strong relative to foreign currencies, overseas profits translate into fewer dollars on a company's US income statement.