The Free-Falling U.S- Dollar

An angry dispute in which everybody is partly right

For foreign exchange dealers it was a week to remember--or better still, forget. Not since the currency upheavals of 1973 have the world's money markets been in such turmoil. Once again the source of the trouble was the U.S. dollar. After slipping steadily in value all autumn, last week it went suddenly into a free-fall plunge that sent it skidding to postwar lows on money markets from Tokyo to Frankfurt. When the dust finally settled at week's end, a dollar could buy only 241 Japanese yen, 2.14 deutsche marks or 2.06 Swiss francs. Since January the dollar has lost 22% against the yen, 19% against the Swiss franc and 11% against the mark. Nor has the once mighty greenback been dropping only against those traditionally strong currencies; lately it has also lost ground against the anemic French franc and British pound.

The immediate reason for last week's plunge was a growing belief among foreign exchange dealers that Washington is complacently prepared to let the dollar bears do their worst. As the dollar's autumn slide gained momentum, dealers began anxiously watching for signs that the U.S. was prepared to step in and buy up dollars to support their price. When news leaked out two weeks ago that U.S. Treasury Secretary W. Michael Blumenthal had met secretly in Paris with European monetary officials, currency traders assumed that a dollar-propping agreement would be announced at last week's monthly meeting of central bankers in Basel, Switzerland. None was forth coming, and the selloff of dollars started anew. By midweek the herd instinct had taken hold, and in Switzerland the dollar lost 1.5% in value in a single day, one of its largest one-day drops. That will make Swiss vacations more expensive for American tourists -- if they can find anyone to exchange dollars for them.

A more basic reason for the dollar's plunge is a deepening quarrel between the U.S. and its trading partners, West Germany and Japan, over what to do about the soaring U.S. trade deficit. By year's end the deficit is expected to total a stunning $27 bil lion, nearly five times last year's figure. Both Japan and West Germany maintain that the deficit is the result of wanton U.S. consumption of imported oil and that Washington must adopt an energy program that reduces U.S. de pendence on OPEC. The Carter Administration argues that it is doing all it can to get the President's energy package through Congress. In its view, Japan and West Germany are foolishly helping to force up the U.S. trade deficit and push down the dollar by pursuing tight economic policies that keep German and Japanese goods pouring out of their countries in far greater volume than imports are coming in.

It is a dispute in which everyone has a point. Japan and Europe are right in arguing that a cut in oil imports, which are currently running at $3.7 billion a month, would immediately reduce the U.S. trade deficit. But they fail to acknowledge that oil imports are increasing largely because the U.S., alone among major industrial nations, is pursuing a broad-based program of economic expansion from which everyone else is benefiting. Japan, for example, has kept its factories humming despite slow domestic economic growth, mostly by selling cars, TVs, steel and other products to the U.S. Consequently Japan is running an $8.5 billion trade surplus with the U.S., drawing American protests against the Japanese trade barriers that keep U.S. and other imports out.

West Germany is also running an international surplus, but unlike Japan, it maintains few barriers to imports. More to the point, West Germany's trade with the U.S. is several hundred million dollars in deficit, and the nine countries of the Common Market as a whole imported $3.6 billion more from the U.S. than they exported to it in the first nine months of this year. As a result, Europeans are understandably resentful of Washington's feeling that they are somehow or other sponging off U.S. expansion and are particularly wary of calls to pump up their own economies. One consequence of doing so would be not only to deepen their trading deficit with the U.S. but to erode their competitive edge in important "third" markets such as the Middle East.

The argument is getting venomous. Europeans are practically unanimous in their conviction that Washington's refusal to support the dollar is in fact a stratagem to force Japan, West Germany and Switzerland to expand their economies or be priced out of the U.S. and other markets altogether. In fact there are already signs that several important sectors of the West German economy are suffering from the rise in the value of the mark against the dollar, which makes German goods more expensive on world markets. Sales of textiles, a major export, are off 3% from last year. Makers of machine tools, who normally export three-fourths of their production, are reduced to hoping that they can close the year with no more than a 20% drop in exports from 1976. West German Chancellor Helmut Schmidt has fumed privately to friends that in letting the dollar fall Washington has shown itself to be bereft of "the slightest economic sense." Switzerland's Weltwoche magazine complains: "Using the dollar weapon, America is waging a real trade war, a war against its friends." If the slide continues, it could also spur OPEC, which receives the bulk of its revenues in dollars, to seek another price hike, if not at this week's meeting of oil ministers in Caracas, then perhaps next spring.

Washington officials correctly point out that so far this year the 'trade weighted" value of the dollar has dropped only about 2% on average against 15 foreign currencies. Major reason: the greenback has been going up against the Canadian dollar and the Mexican peso, the currencies of two of the most important U.S. trading partners. Some economists also argue that the fall of the dollar should help to shrink the U.S. trade deficit by making U.S. exports cheaper and imports more expensive.

True enough, but the U.S. is paying dearly in international ill will, and the dollar's plunge has undesirable side effects. For example, some countries have been buying up unwanted dollars to keep the price from dropping further; that can increase money supply in the purchasing countries and add to world inflationary pressures. The uncertainty created by the drop could also hurt world trade and investment. Already, U.S. firms buying or selling abroad must haggle about what currency is to be used for payment, and some companies building plants in Europe have had to shell out far more dollars than they ever expected to get the foreign currency to pay for the construction. In international finance, as in other matters, too much is too much.

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