An Invalid Abroad

The American dollar has been declining irregularly on world money markets for the past five years, but never in the postwar period has its value against major European currencies sunk so low for so long. Since last September, the greenback has fallen roughly 13% against the Belgian franc, Dutch guilder and West German mark, and has lost 20% of its former worth in French and Swiss francs. Last week U.S. currency fell below the level of four francs to the dollar for the first time since 1973--and the consequences of its slump were making some disturbing waves.

On a state visit to the U.S., the Shah of Iran disclosed that the Organization of Petroleum Exporting Countries will probably use the weakness of the dollar to justify another increase in oil prices this fall. The oil producers have complained repeatedly that the shrinking value of the dollar, which is the chief currency used in oil transactions, has steadily reduced their ability to buy industrialized goods. Indeed, an unconfirmed press report out of Saudi Arabia last week asserted that OPEC was planning to lift oil prices by an unspecified amount as early as June. Washington officials discount the report, but they do not rule out an oil price boost of up to 15% in September.

Americans traveling abroad, especially in Europe, are running into nightmarishly high prices. Part of the reason is European inflation. But, relatively, prices for Americans spending weakened U.S. currency are even higher. A single room at such hotels as Amsterdam's Hilton and Cologne's Inter-Continental now cost at least $50 a night, v. as low as $35 18 months ago. A modest dinner for two in Switzerland--cheese fondue and a bottle of wine--can run to $30. In Paris, peaches from Southern France sell for the equivalent of $8 each, and a cup of coffee rarely costs less than 60-c-.

Moreover, as the dollar's value shrivels, the cost of foreign imports into the U.S. swells, contributing to American inflation. A fully equipped Volkswagen Rabbit, for instance, can now carry a price tag of nearly $4,000--as much as a medium-sized Ford Granada.

On the other hand, the dollar's dip helps U.S. exports by reducing their price in foreign countries.

The strangest aspect of the dollar's slump is that it continues despite wide agreement among fiscal experts that the greenback is now drastically undervalued. According to the West German Statistical Office, a dollar in the U.S. now buys as many goods as 2.94 marks will in Germany--yet the dollar was being traded in Germany last week for only 2.33 marks. The most immediate reason is that for months, American interest rates have been dropping, while in Europe rates were rising. Seeking the highest return, investors, including American-based multinational firms, have been dumping dollars and buying into currencies such as the franc. In France, the prime interest rate now is more than 12% v. as little as 7% in the U.S.

Foreign moneymen have hope that the dollar may be nearing the end of its decline--especially if prospects for an upturn in the U.S. economy continue to improve. But nobody expects a strong rebound, much less a return to the robust exchange rates of the 1960s. Too many dollars spilled out by years of U.S. international deficits are still sloshing around the world, and as long as that continues, the once mighty greenback is likely to remain an invalid abroad.

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