Some Reasons for Worry

For many Americans, the international hand-wringing over the sagging value of the dollar abroad is as mystifying as a voodoo ritual. If the dollar's fate overseas is considered at all, it is thought to be a problem for foreigners and international bankers and not for those concerned with the day-to-day matters of Main Street. Nothing could be further from the truth. The dollar's tumbling exchange rate affects Americans and their economy in a number of practical and mostly harmful ways. Among the areas of greatest impact:

>> Living costs abroad. Americans traveling or residing overseas have felt the effect of the dollar's drop most immediately and directly, especially in such countries as West Germany and Switzerland, where the greenback's decline against local currency has been severe. In Switzerland the franc has risen 25% against the dollar in the past year. A tourist couple may well spend $45 for a not particularly lavish dinner with a bottle of wine, v. $36 a year ago--even though the price of the meal in Swiss francs has not changed. In West Germany, where the inflation rate has been running at about 4%, Americans exchanging their dollars for deutsche mark have suffered a 34.5% loss in purchasing power during the past two years. Hardest hit are the 224,000 U.S. soldiers and airmen stationed in the Federal Republic, especially low-ranking G.I.s with families that they must house in off-base apartments.

>> Inflation. When the dollar's value drops, the price of French wines, Japanese cameras and other foreign goods imported into the U.S. goes up. For example, the average cost of all Volkswagen models sold in the U.S. last year climbed almost 14%. Computer models of the economy indicate that at present levels increased prices for foreign goods directly add only .2 to .3 percentage points to the U.S. inflation rate. But some economists believe that the indirect impact is greater. Reason: if import prices rise, American companies can increase the price of domestically produced goods that compete against imports, without fear that foreigners will undersell them. Moreover, the dollar is the currency most often used in world oil transactions. Although OPEC has frozen the price of oil until June, it might boost prices then to make up for a continued slide in the value of the dollars that its member countries earn by selling oil. That would further fuel inflation.

>> Exports. In classic theory, a decline in the dollar makes American goods cheaper and therefore easier to sell in foreign markets. That does happen, but the benefits are smaller than is often supposed. Many of the products that the U.S. sells abroad are "price inelastic"; sales do not necessarily go up when the price goes down. The U.S. is a major exporter of commercial jet aircraft and computers. But overseas customers buy them on the basis of quality and need, not price. Much the same is true of another major U.S. export, agricultural goods. The quantity of wheat that American farmers sell to Japan or the Soviet Union depends less on price than on the state of harvests around the world. U.S. exports of machinery and consumer goods do benefit from lower prices --but their prices were competitive with those of foreign products before the dollar's slide began.

>> Operations of multinational companies. They get some benefit from a weaker greenback because profits earned in, say, West German marks or Swiss francs are worth more dollars to be sent back to the parent company in dividends, though this can be offset by the greater dollar operating costs abroad. Also, American-owned multinationals have been slowing down investment abroad. One reason is the sluggishness of European and Japanese economies. The drop of the dollar has added another reason, by increasing the amount of dollars that multinationals must spend to build, buy or expand foreign factories. Weakened American investment abroad prolongs the global economic stagnation that the U.S. wants to counteract.

>> Foreign investment in the U.S. Cheaper dollars have led European investors, particularly West Germans, to buy American properties at bargain rates. Says Zurich Real Estate Broker Richard Ufer: "Ten years ago every German millionaire wanted to own a jet. Now the status symbol is a farm in America." But as the dollar's value sinks, some foreign investors are having second thoughts; profits on their U.S. investments are earned in dollars that are worth a declining number of marks and Swiss francs. The possibility is growing that foreign investors will pull much of their capital out of the U.S.; such a flight would cause the dollar to plummet even further and force the U.S. to intervene in foreign markets on a huge scale. That in turn could work to limit funds available for credit in the U.S., kick interest rates up and hurt capital spending and home building.

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