The dollar's unnerving slide and stunning rally--which barely survived its fourth day Thursday--provide a case study of how financial speculators and central bankers throughout the world can drive a nation's currency up and down. But beyond the spectacle of an American symbol gyrating wildly on world markets, the wavering dollar raises important concerns, both economic and political.
Its leaps and dives affect what consumers pay for many imported products, from cars to cameras, wine to watches. Expectations that the dollar will fall further, widely held among traders, inhibit foreigners from investing in the United States. In addition, the dollar's level helps determine the ability of American manufacturers to make money abroad and the ability of their foreign competitors to sell at a profit in this country.
"The lower dollar means that imports are more expensive, so domestic producers have a better shot at getting the consumer's dollar," said Irwin L. Kellner, chief economist at Manufacturers Hanover Trust in New York. "And the direction of the dollar is important to the financial side of the economy--both here and overseas."
On Thursday the dollar's direction was up in the Far East and down in Europe, where traders responded to rumors that powerful national banks had decided to abandon their expensive efforts at pushing up its value. After some teetering, it ended the day slightly higher in the United States. The dollar closed at 130.15 yen in New York, up from 129.35 yen Wednesday, and at 1.6565 West German marks, up from 1.6470 marks.
The central banks, which spent more than $3 billion supporting the beleaguered currency earlier in the week, appeared to leave the dollar's fate to the jumpy marketplace Thursday. But the dollar got a boost from U.S. Federal Reserve Vice Chairman Manuel H. Johnson, who repeated that the major industrial nations were prepared to protect it and warned speculators that gambling on a renewed plunge of the currency's value "is a risky bet."
In fact, experts are divided on whether a further decline would be a bad thing for this country. Many business leaders argue that the lower dollar already has boosted U.S. competitiveness greatly and that the trend should continue. One example: On Thursday, Sanyo Electric Co. announced plans to import U.S.-made color television sets to Japan--an event that would have been unthinkable just a few years ago.
In its 34-month slide, the dollar has given up half of its value to the yen and mark, enhancing the performance of such industries as chemicals, steel, paper products and office equipment in formerly daunting overseas markets. "We would have no objection if it fell another 25% over the next two years," said Gordon Richards, an economist with the National Assn. of Manufacturers in Washington.
Conflict for Administration
Calculations by the Bureau of Labor Statistics show why. The average price paid by foreigners for U.S. exports fell 21.5% between March, 1985, and September, 1987, a trend that has continued.
American-made office machinery now costs 33.1% less on average abroad, though the figures vary considerably in different countries. Scientific and other instruments cost 22% less on the average. U.S. exports leaped 17% in 1987 while imports increased just 4%, a factor that kept the vast trade deficit from being even worse.
These striking benefits provide a conflict for the Reagan Administration, which seeks to avoid a recession in an election year. Although manufacturing has been revitalized, further drops in the dollar could spark inflation, led by higher import prices.
Also, a free-falling dollar would make foreigners reluctant to invest in the United States. Such foreign investment has become crucial to financing the nation's burgeoning debts. "That is why the Administration is not really pressing a uniform view (on the dollar)," Kellner said. "It's not all clear to them what is the best course of action. For the time being, they've tried to stabilize things."
Imports Cost More
Many business leaders, however, clearly like a cheaper dollar and are in no rush to see its fall interrupted further by the Federal Reserve and other central banks. "Let's see where it's going to go, so we can find a decent place to support it," Roger B. Smith, chairman of General Motors, said in an interview with Reuters news service.
Americans, meanwhile, are paying substantially more for imports, on average 18.8% more when oil is not considered. To cite a few examples of import price hikes since the the dollar began falling: Apparel is up 12.7%, wine is up 21.2%, automobiles are up 24.5%, medicine and drugs are up 29.7% and cameras are up 39.4%.
These price increases explain why the Bank of Japan and the West German Bundesbank have spent more to support the dollar than the Federal Reserve has. "They're not doing it out of the goodness of their hearts," said Robert H. Chandross, chief North American economist for Lloyds Bank. "They're doing it to limit the damage to their exporters."