The Rise Heard 'Round the World

From Argentina to Taiwan, the dollar's strength is taking its toll on countries that have adopted the greenback as their currency standard.

But the strong dollar is welcome in Germany and the rest of Europe - boosting exports in the face of otherwise lackluster growth.

"The only real strong point of the [German] economy right now" is exports, says Peter Pietsch of Commerzbank's in Frankfurt. In France, the trade surplus reached a record high for 1996, as a strong dollar helped sales of products such as the aircraft made by Airbus Industrie in Toulouse. Meanwhile, weak domestic demand slowed imports.

Much the same holds true across Europe. Domestic demand is weakened by high unemployment and government austerity programs. Exports "should slow down the reduction of jobs, and might lead to new jobs" in time, says economist Rainer Veit at Deutsche Bank, Frankfurt.

Mr. Pietsch ascribes the strong dollar principally to concerns that the new European currency union, set for 1999, will be too large - including Italy, Spain, and perhaps even Portugal - making the "euro" relatively soft, unlike the German mark. This makes the dollar more attractive by comparison.

Deutsche Bank expects the dollar to remain just a nick under 1.70 deutsche marks over the next year. Veit says a weak mark begins to hurt Germany at 1.80 marks to the dollar. The Bundesbank would intervene to push up the mark to prevent import-driven inflation.

Dollar-standard blues

Argentina, which since 1991 has pegged its peso on a strict parity with the dollar, feels a crunch in exports. As the dollar rises, so automatically does the price of Argentine beef, cereals, and mining products in foreign markets.

Taiwan's Central Bank of China is also committed to stable exchange rates with the US dollar. Now its strong currency comes at a price. While Taiwanese investment capital has flowed outward at alarming rates, inward domestic investment has slowed to a trickle.

Also, Taiwan's trade position could be seriously affected, especially with Japan where the yen has sharply depreciated. Japanese electronics companies have relied on Taiwan as a cheap source of high-quality computer hardware, but these purchases are in decline, says economist Kuo Wen-cheng at the Chung-Hwa Institute of Economic Research.

"Because of a stronger [Taiwan dollar] and a weaker yen, Taiwan will face more and more competition, which will not benefit us in the long term," Mr. Kuo says.

Where the dollar has fallen

While the rest of the world worries about a strengthening dollar, Mexico frets about an overvalued peso. The dollar has weakened relative to the peso in the wake of a flood of investment dollars south of the border. The dollar has dropped to 7.75 pesos from 7.9 pesos on Jan. 1.

One result: a shrinking trade surplus with the US. Mexico's monthly surplus dropped to $700 million in December from $1.5 billion in November.

Economists expect that trend to continue. But they also worry about an abrupt peso devaluation should the dollar-investment balloon pop. The Bank of Mexico recently implemented a plan to intervene in the currency market on any day when the peso fluctuates by 2 percent or more. Many doubt the plan can put off another sharp peso devaluation.