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The U.S. Dollar Soars and Swoops on the Winds of World Speculation

July 10, 1988|Walter Russell Mead | Walter Russell Mead is the author of "Mortal Splendor: The American Empire in Transition" (Houghton Mifflin).

NEW YORK — Once again the world's money markets are churning, and once again the world's central bankers are at cross-purposes. The dollar, which only weeks ago was the sick man of the foreign-exchange markets, soared like an eagle for a few days; and while the West German Bundesbank is doing what it can to hold the dollar down, the Japanese, smiling serenely, are watching it fly. Meanwhile in Washington, an Administration that spent its first term gloating over the dollar's rise before spending most of its second term trying to force it back down has switched back to its original line: The dollar is strong because the Administration's policies have been successful at making America a good place to invest.

The average citizen can be excused for feeling dizzy. For more than two years the dollar has been on the skids; the only question seemed to be how fast it would fall. Only weeks ago the world's economic leaders posed for snapshots in Toronto with their arms around one another, smiles glued to their faces. Suddenly, everything turned around. The dollar bounced; the allies squabbled.

With the United States no longer trying to keep its currency down, investors took another look at the dollar last month, and many liked what they saw--short term. The trade deficit has been shrinking and inflation is low. Other countries, particularly Britain, have been looking less robust. All over the world, portfolio managers edged into dollars.

The spat involving West Germany, the United States and Japan is another case of plus ca change. Vows of eternal friendship and cooperation are the oldest tradition in diplomacy; the second oldest is breaking them. The major Western nations were briefly scared into something like sincerity after the crash last fall, but the shock has worn off and business is back to normal.

West Germany is worried about a strong dollar because that means higher prices for its imports and, although German inflation now averages a modest 1% per year, this is too much for the timid souls at the Bundesbank--West Germany's even more conservative version of the U.S. Federal Reserve. Meanwhile, the outlook for the mark has turned cloudy. The reasons: West Germany's record budget deficit and its fear of inflation. Unemployment stands at almost 9%; the West Germans don't expect to lower this by much, but they've refused to abandon the poor to wander homeless through their streets. Obviously, this means continued social spending and a continuing deficit problem. The West Germans--burned by horrifying inflations in the aftermath of both world wars--see inflation under every bed, and the combination of record budget deficits and a rising dollar scares them silly. If the dollar goes up, so will the West German cost of goods priced in dollars--including oil. More inflation, more worry. West Germany will tighten its interest rates to protect its currency, less willing than ever to take a turn as the world's "economic locomotive."

Japan, on the other hand, welcomes the revitalized greenback. A stronger U.S. dollar means profits for Japan's bondholders, as well as a nice dividend for those who have invested in U.S. property and companies. As an added sweetener, if the dollar drifts up from its present level of about 135 yen and stabilizes above 140 yen, Japan's goods would begin to become more competitive in the American market.

In Washington, the rise in the dollar is being greeted with quiet satisfaction--at least by friends of George Bush. While a higher dollar will make American goods less competitive in the long run, and therefore tend to freeze the trade deficit at a figure not far below the current annual level of $140 billion, recent experience suggests that this will not show up in the statistics for months or even years--until, in other words, long after the second Tuesday in November.

Other short-term benefits of a rising dollar are to cool off inflation and bring down interest rates while attracting foreign investors. The prospect of low interest rates, low inflation and good trade statistics on Election Day intrigues the GOP. A frisky stock market wouldn't hurt either; a hefty 1988 rise could make October, 1987, look very long ago and far away.

In the long run--post-election--the outlook isn't as rosy, either for the greenback or for the country. Figures released late last month show that the United States has continued its rake's progress into debt, adding $99 billion to an already awesome debt mountain and putting us on ground where angels, or even Argentines, fear to tread. Even more confusing, perhaps, to those who follow the numbers: The trade deficit, after shrinking from $13 billion in January to $9.89 billion in April, is believed to be increasing again, with most Wall Street soothsayers predicting a $12 billion figure to be released next week.

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