No Time for Panic

AMERICANS have been waking up every morning this week, it seems, to reports of the dollar at a new postwar low against the Japanese yen and remaining weak against the deutsche mark.

And every day a new explanation for the drop seems to come to the fore. For example, an indication by Alan Greenspan, chairman of the Federal Reserve, that the Fed's recent string of interest-rate hikes has come to an end has driven foreign investors to seek higher returns elsewhere.

Earlier, foreign investors were said to be fleeing the dollar because they thought the US economy was overcommitted to helping Mexico through its financial crisis.

Then there are obscure technical factors: Repatriation of dollar-denominated profits to Japanese companies close out their fiscal year this month. And the mark is strengthening in response to the weakness of other European currencies.

Whatever the causes of the drop, however, this is not a time for panic. The United States does run chronic trade deficits, and this has implications in the currency market. But the other fundamentals of the American economy remain sound: strong growth for a mature economy, low inflation, and low unemployment. The federal budget deficit is politically troubling but is the lowest deficit, as a share of gross domestic product, of all the major developed nations.

Mr. Greenspan came out forcefully Wednesday against the weakness of the dollar (a view the Germans have endorsed), but at this writing, the administration has taken no other action - unlike last week, when the Fed bought up dollars to no avail.

The Fed could raise interest rates again, after all, but that could bring on a recession. The risks of doing nothing seem less than the risks of doing something, and much less than the risks of something ineffective.

Meanwhile, Americans can expect to feel some limited effects from the dollar's fall. Gasoline prices may rise, and some travelers may want to vacation in Mexico (against whose currency the dollar has been rising) instead of Europe. And the fall of the dollar is making American exports more competitive in world markets - which is why German observations that the dollar has fallen undeservedly far are not without self-interest.

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