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Dollar's Fall No Quick Fix, Analysts Say

July 15, 1985|STEVEN P. ROSENFELD | Associated Press Business Writer

NEW YORK — The powerful dollar, blamed for ravaging America's manufacturing industry but hailed for helping tame inflation, looks like it finally may be retreating from a historic five-year rally.

Since reaching uncharted heights in February, the dollar has recently fallen more than 15% against other major world currencies, dropping to levels last seen in the summer of 1984.

On Wall Street, the prospect of a lower dollar, and hopes that such a development will improve profits for U.S. businesses that compete in world markets, helped to ignite a rally that sent the Dow Jones average of 30 industrials climbing to record heights last week.

But analysts say that even if the dollar's decline continues--an event that is far from certain--there will be no quick fix for the damage to the economy attributed to the dollar-- mainly the unprecedented trade deficits that represent lost job opportunities in export businesses for hundreds of thousands of Americans. (A strong dollar has meant that foreign goods are cheaper for Americans to buy and that American goods are more expensive for foreigners to buy.)

No Speedy Change

"We are moving in the right direction, but there will not be a speedy change that will bring immediate relief to those sectors of the economy hammered in recent years," said Lawrence Kreicher, an international economist at Irving Trust Co.

What's more, a falling dollar raises the risk of a resurgence of higher inflation because each dollar will buy less overseas.

The dollar's earlier surge, which contributed to the flood of relatively low-priced imports that has hurt U.S. manufacturers, did help reduce the rise in consumer prices from 13.3% in 1979 to 4% last year and an annual rate of 3.9% so far this year. Domestic companies had to become more efficient to hold down prices to survive the increased competition from abroad.

Meanwhile, analysts contend that, while the dollar's recent decline has been dramatic, it still is trading at historically high levels.

Although the dollar has been on the skids for more than four months, it still is about 65% higher than the depressed levels of five years ago, according to the Federal Reserve Board's trade-adjusted measure of the dollar against the currencies of 10 other leading industrial nations.

"This fall brings the dollar out of the ionosphere and into the stratosphere. I don't expect any major impacts yet," said David Ernst, an international economist at the Washington consulting firm Evans Economics Inc.

Cost of Financing Deficit

Ernst said that if the dollar falls further, the cost of financing huge federal budget deficits in the United States will increase. That is because foreign investors who buy billions of dollars of Treasury bonds will demand higher interest rates when they lend money to the United States to offset the increased risk of foreign-exchange losses when their securities mature.

Currency traders said there is little mystery about the dollar's fall, with the blame placed on sluggish economic growth in the United States and lower American interest rates--factors that reduce returns on dollar-denominated investments and make investments elsewhere more attractive.

One reason economic growth has slowed is the trade deficit, which reached a record $123.3 billion last year.

The Commerce Department has predicted that the deficit will increase to between $140 billion and $160 billion in 1985, a development that could translate into nearly 1 million lost job opportunities. Kreicher estimates that, each time the trade gap widens by $1 billion, there are 25,000 fewer jobs available.

The Conference Board, a business-financed study group, said the strong dollar has been the main reason why 10% of the nation's largest manufacturing companies are operating at less than full capacity. Hit hardest were producers of non-electrical machinery, iron and steel companies and paper products concerns.

According to Kreicher's calculations, it would take another 5% to 10% drop in the dollar's value before the trade deficit stops growing, and the gap would have to start shrinking before there are any employment gains.

"We believe the dollar is heading lower. Certainly the five-year upward trend is in the process of breaking down," Kreicher said. "We don't see the sustained decline of 5% to 10% necessary to rectify this (employment) problem or at least control it." Kreicher said he does not expect the deterioration of U.S. trade to stop before 1987, and he says that it will take even longer to see improvement.

As for inflation, Kreicher said each 10% decline in the dollar adds 2 1/2 percentage points--but not all at once--to the consumer price index, which is the measure of the average level of prices over time in a fixed market basket of goods and services.

"If the dollar drops 10% today, the inflation rate will be up a half point in the next year," he said.

Mixed Blessing Abroad

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