A Delicate Dollar Balance

If world financiers ever wanted to stay awake nights worrying in the past two years, they could always lie abed wondering about a sudden crash of the dollar that might lead to international economic chaos. That grim scenario came a bit closer to reality last week as the U.S. currency skidded to its lowest level in a year. From a peak reached in late February, the value of the dollar has declined an average of 14% against major currencies and 24% against the British pound.

Inasmuch as the dollar had remained unusually strong for four years, its drop was a belated blessing to many. American exporters applauded the change since it should lower the price of their goods abroad and make imports more expensive. That would help arrest the growth of the trade deficit, which is heading toward $150 billion this year. Says Harvey Bale, an assistant U.S. trade representative: "This adjustment is welcome. The dollar was way out of line."

The downward drift in part reflects diminished confidence in the U.S. economy. Some currency traders have dumped dollars because they believe the recovery is coming to an end. The concern was reinforced last week when new Commerce Department figures showed that the economy in the second quarter grew at a 1.7% annual rate. That was well below the earlier estimate of 3.1%.

Foreign-exchange traders were also responding last week to congressional testimony by Federal Reserve Board Chairman Paul Volcker. He announced that Fed policy will continue to be "accommodative," allowing the money supply to grow. That could translate, traders calculated, into still lower interest rates, which would make it less attractive for foreign investors to hold dollars. Volcker insists, though, that he is "not interested in jumping on a decline of the dollar and pushing it lower." He maintains that the answer to the problem of the overvalued dollar is a reduction in the budget deficit. As Volcker pointed out, a drop in the dollar is dangerous because the U.S. depends on the inflow of foreign capital to finance the deficit.

Is the dollar about to collapse? No consensus exists among experts. Trade Official Bale does not anticipate a crash, but Rimmer de Vries, chief international economist of New York's Morgan Guaranty Trust, is less sanguine. Says he: "If there is loose monetary policy and no budget compromise, confidence in the dollar would be destroyed." Other economists envision a slower but inexorable fall. Stephen Marris, a senior fellow at the Institute for International Economics, warns of a deep decline in the dollar's value extending over two to four years. As a sign that the dollar's slide will probably not turn into a free fall, the American currency's value strengthened at week's end.