The Incredible Superdollar

By John Greenwald

While TIME's European Board was meeting last week, American tourists abroad were enjoying the benefits of the strongest dollar in years. Travelers in French restaurants, British department stores and Italian antique shops happily found that their dollars bought a lot of the good life. Despite yearlong predictions that the U.S. currency would fall in value, it was flying higher than ever. The dollar reached a ten-year peak against the West German mark and set records against French, British and Canadian currencies.

Bargain-happy vacationers were not the only ones to notice. As the linchpin of world trade and finance, the surging dollar affects everyone, from American consumers and manufacturers to Third World borrowers, and the effects of the strong U.S. currency were felt last week far beyond money-exchange markets. In New York, gold prices dropped to a two-year low of $338 an ounce, as speculators dumped the precious metal to invest in dollars. In Chicago, commodities prices fell as well, further depressing goods as varied as soybeans and lumber. Since May, commodities prices have dipped nearly 9%, in part because of the rush to buy dollars.

A powerful fusion of forces has been propelling the dollar upward. "It's not just a single factor," says Salomon Brothers Chief Economist Henry Kaufman. "It's the combination." High U.S. interest rates that attract foreign cash are among the major reasons. At 13%, the U.S. prime rate is at its loftiest since September 1982, and pressures from the huge federal deficit and the economic rebound are likely to drive the prime higher. High interest rates, of course, can be good for those with money in the bank.

The robust American economy has also made the U.S. a land of investment opportunity. Unlike other developed nations, America is currently basking in a sunny combination of strong growth and moderate infla- tion. After expanding at an annual rate of 9.7% in the first quarter and an estimated 5.7% in the second, the U.S. gross national product is expected to increase some 5.5% during all of 1984, or more than twice as much as the average for other industrial countries. U.S. inflation, meanwhile, has fallen to less than 5%. Last week the Government reported that wholesale prices did not increase in June, the third month in a row of no change.

The strong dollar is a mixture of both pluses and minuses. On the positive side, it not only creates travel bargains but also lowers the cost of Italian clothes, Japanese cars and everything else that Americans import. Although the resulting flood of foreign goods has helped to create a yawning U.S. trade deficit, the cheap imports have done much to hold down prices. As the dollar's value swelled in 1981 and 1982, inflation fell from roughly 9% to 4%. "About half of that drop can be attributed to the strong dollar alone," says John Paulus, Chief Economist for Morgan Stanley, a leading investment banking firm.

By making foreign products cheaper, the U.S. currency is also spurring Europe's recovery. Said West Germany's Herbert Giersch at last week's board meeting: "We in Germany are quite happy about the value of the dollar and the fact that the United States is pulling in so many of our resources."

But the vigorous dollar has drawbacks as well. It adds to the burden Third World borrowers face by raising the cost of the dollars they need to repay their debts. It also has been punishing U.S. farmers and companies whose products have a hard time competing with low-priced foreign goods. "Exporters are just taking it in the neck," says Jerry Jasinowski, Chief Economist for the National Association of Manufacturers. Indeed, U.S. trade deficits that could reach $130 billion this year have cost some 1.2 million U.S. jobs since 1982.

What now worries some experts is the chance that the dollar may come crashing down. That could happen if skittish investors decide that the currency is greatly overvalued and suddenly start to sell. Such a run could blunt the U.S. recovery by draining off cash needed by American industry. Many observers believe, however, that the economy's vigor makes a dramatic pull-out unlikely.

Still, forecasters have grown wary of trying to predict just where the high flying dollar might next be headed. Said Board Member Sam Brittan last week: "There could be a sharp drop in the dollar over the next six months, or there could be a gradual drop, or it could move even higher. The only honest answer is that we do not know." Having been consistently amazed by the dollar's surge, the experts now prefer to let the currency do the talking. -- By John Greenwald. Reported by Christopher Redman/Washington and Adam Zagorin/New York

With reporting by Christopher Redman, Adam Zagorin