Battered Buck Is ''No Biggie''
Dropping dollar won't soon pinch your pocketbook, but could stir inflation
WASHINGTON — LATELY world money markets have been treating the United States dollar with the same lack of respect they give the lowly Mexican peso. Dollars are continuing to plunge in value relative to yen and marks, to the point where it seems traders must be mistaking them for some other currency -- Confederate dollars, perhaps, or Tsarist-era ruble scrip.
Yet as financial page headlines declare ''Dollar Hits New Low'' almost daily, should US consumers care? Will dollar weakness translate into economic weakness, spreading unemployment and business losses throughout the land?
Economists answer: Slightly, and probably not.
In the long run, a weak dollar is not in the country's best financial interests, say economists. In the short run, the average American should feel little pocketbook impact from the dollar crisis.
''So far as domestic considerations go I don't think we should be concerned about the international value of the dollar,'' says Anna Schwartz, an economist in New York with the National Bureau of Economic Research and noted historian of money.
One reason for this confident attitude is that the dollar's slide is, in fact, a limited one. US currency is not declining in value relative to the whole world; if it were, that might well indicate that the US economy was facing major structural problems similar to those troubling Mexico.
Instead, the dollar is going down only in relation to the the German mark and the Japanese yen.
So far this year, the dollar has lost roughly 11 percent of its value against the mark and around 16 percent against the yen. As of this writing, the dollar was continuing to lose ground, declining to 81.5 yen in Tuesday trading in Tokyo.
The major immediate danger to consumers of a falling dollar would be a sudden, fiery round of price inflation. A weaker dollar makes imports, such as Japanese cars, that much more expensive; if the change is great enough, widespread inflation occurs.
Inflation not likely
Economists don't think that will happen this time around. The reason: Only Japanese and German imports will become more costly. Despite the widespread presence of Toyotas and Volkswagons on US roads, Japanese and German products don't have enough market share to spark inflation on their own.
Japan accounts for about 15 percent of US foreign trade, for instance. Yet Canada is the largest US trading partner, accounting for 21 percent. And the US dollar has gone up against its Canadian counterpart, creating an anti-inflationary back draft that counteracts the rising prices of Japanese imports.
In some ways the dollar's decline helps the US economy. US exports are cheaper, likely leading to increased orders and brighter economic prospects in export-dependent industries such as aircraft production. This effect is already being felt in Japan: Chrysler has announced it will cut the price of its Jeep Cherokee in Japan by 10 percent. Lower prices helped US personal computer manufacturers to double their share of the Japanese market last year, to about 30 percent.
A continued decline in the dollar could cause pronounced economic problems. Foreign investors might begin to judge US stocks and bonds as overall bad investments and pull their money out, causing turmoil in markets that crave stability. Yet many economists don't think the dollar will fall much farther against the yen. Of course, many of them didn't think it would fall as far as it has, either. Over the last four years the dollar has depreciated by some 42 percent against the yen.
''The dollar has overshot,'' says Robert Solomon, a financial expert at the Brookings Institution, a policy research group in Washington. ''But I don't know how far down it will go. It's very puzzling.''
The reasons for the dollar's decline are many and varied. US interest rates are low by international standards, causing foreign money to flow elsewhere. The large federal budget deficit causes money managers to think less optimistically about the US economy. The US trade deficit with Japan remains high, despite the fact that US products are becoming cheaper in Japan and Japanese products are becoming more expensive in the US.
In general, US officials point their fingers at Japan, and say the dollar's slide versus the yen is their fault. The Japanese return the favor. That's why Treasury Secretary Robert Rubin complained this week that Japan's just-announced yen rescue package was thin gruel -- and why Japanese officials hit back shortly thereafter, sniffing that the US should put its deficit house in order.
It's unlikely that the dollar's slide will result in fundamental economic change in either nation, note a number of economists. Changes that could halt the dollar's slide, such as a hefty hike in US interest rates, would just be too economically onerous.
''Governments, in my opinion, would be well advised to correct the fundamentals that have led to this problem, instead of complaining about the symptoms,'' says Allan Meltzer, an economics professor at Carnegie Mellon Univeristy in Pittsburgh.
Overall, the US government has been relatively passive in regards to the current slide of the dollar. There has been some desultory intervention in currency markets in an effort to prop the dollar up, but nothing currency trades judge a concerted move. Some feel the US government wants the dollar to fall, to make US exports competitive. US officials deny they have such a hidden agenda, and say they want a strong dollar to protect the US' economic status in the world.
If there has been a victim in the current currency slide, it's Japan. Whenever the yen goes up against major currencies, big firms in Japan's highly export-dependent economy warn that they are losing money.
Export revenues, after all, are earned in dollars and other currencies. If those currencies suddenly buy fewer yen, the firms need to make yet more revenues to pay Japanese workers and buy supplies from Japanese subcontracting firms.
The yen's appreciation is known in Japan as endaka. So far, endaka has hit hard at something that was supposed to be an engine of Japan's economic recovery: capital investment. The declining value of their foreign profits has made many firms more reluctant to invest in new factories and other facilities.
Endaka has also continued to push Japanese companies offshore in search of less costly places to manufacture. Although the level of Japan's direct foreign investment have not yet reached those of the boom years of Japan's late-1980s ''bubble economy,'' companies here have been going to great lengths to get out of Japan and trim costs.
To this point the push for overseas manufacturing has not led to widespread loss of jobs in Japan itself. This continues to be a worry for Japanese workers, however, as firms warn that they will soon reach a point where further cost-cutting will have unpleasant social consequences.
This is a common warning in Japan, however. Anticipated dislocations somehow ''never seem to happen,'' says Merrill Lynch Tokyo-based economist Ronald Bevacqua.
Despite economic pressures, Japanese companies tend to carry excess workers in slow times, in the name of protecting the national interest.
Still, the economic effect of the dollar's slide in Japan is likely to depress consumer spending. Annual negotiations between Japanese unions and their employers have this spring netted relatively small pay increases. Nippon Telegraph and Telephone Corporation, for instance, agreed to raise wages 2.8 percent -- the smallest increase in 10 years.