LONG a stable currency, the now-weak American dollar will likely continue to slip during the coming months. The poor international financial climate, coupled with United States election-year jitters, adds to uncertainty over the once-mighty greenback.
Analysts point to two principal reasons for the continuing decline: first, the growing gap between US interest rates, at a 20-year low, and German rates, now at a 30-year high; second, the US domestic political scene.
In pursuit of higher yields in Germany, investors are selling off their dollar-denominated holdings, buying up German marks, and driving the dollar lower.
The German central bank (the Bundesbank) consistently rebuffs international pressure to reverse its rigid policy of guarding against inflation by keeping rates high.
While incumbent George Bush is constrained - he has no leverage over the Bundesbank and cannot lean on the Federal Reserve Board to raise US interest rates without incurring the wrath of recession-battered voters - he is taking the heat for the dollar's plunge.
President Bush's reliance on lower interest rates as an economic policy tool made borrowing at home cheaper but forced capital flight abroad, where investments reap higher returns.
Bush's challenger, Democratic nominee Bill Clinton, says the sharp drop in the dollar demonstrates the business community's lack of faith in the president's economic stewardship.
But Joe Cobb, chief economist for the Senate Republican Policy Committee, says the drop measures the market's uneasiness over a possible Clinton victory in the Nov. 3 election. American investors, he says, are showing that they will hedge against the danger that Bush may not make it to the White House.
"With a Clinton victory, they see large US deficits and economic trouble ahead," Mr. Cobb warns. "If the money managers sell off 2 percent of their dollar portfolios," he warns, it could start a trend and result in the US currency's free fall.
White House officials note the importance of exports to the US economic recovery, and say that the lower dollar makes US goods cheaper and more attractive in overseas markets.
"Export benefits from a weakened currency are extremely temporary," Cobb says. "Once the dollar is down, there are immediate expectations that the dollar will rebound. It's just like a store that has a sale. It may attract a few extra customers at the margin, but it won't increase its sales on a permanent basis."
Veteran trade expert Richard Whalen says, "Anybody who tries to justify the weaker dollar with better export prospects will be very disappointed." Mr. Whalen says that US goods may cost less for important trading partners, such as Canada, Japan, and European countries, but an economic downturn in these economies has dampened demand for imports at almost any price.
"No matter what we do to our currency, these economies just won't absorb more US exports," says Whalen, who heads a Washington-based financial trade and consulting group by his name. He also counters the administration's assertion that US exporters will enjoy even better sales in already robust developing world markets such as Mexico and Latin America. "We have been financing those purchases with loans. Those markets are sensitive to whether or not we extend credit, not the value of the dollar."
Is the low value of the dollar a reflection of the weak US economy, and will it put Bush's leadership in a bad light?
"The US economy is only a backdrop for what's happening with the dollar," says David Hale, chief economist for the Chicago-based Kemper Financial Services. He attributes the dollar's decline to "tensions in Europe," including economic upheaval in France, where a referendum may result in France's rejection of a common European Community monetary system; in Italy, now suffering severe budget troubles; and in Britain, where there is no relief from the severe slump. Mr. Hale says, "The perception is that the
only safe place to be in is deutsche marks."
Hale, who has been advising both the Clinton and Bush campaigns on economic issues, doubts whether the Democratic challenger will earn any political capital from the US currency's plunge. "Clinton could say that the low dollar reflects a weak economy," says Hale. "But if he said he wanted to see the dollar go lower or higher, then we'd get financial turmoil. And Clinton would get blamed for it."
Whalen calls it a "phony dollar crisis," which originated in the excessive strength of the German mark in relation to the dollar and other currencies. "The Germans' severe aversion to inflation is hurting their relationships with countries all around the globe."
Intervention is not an option. Washington economic policy makers have only once choice, Whalen says. "We have to out-wait the Germans, until they get over this severe case of righteousness."