Can Anything Help the Dollar?

The crises now are coming week by week, and fresh ideas are scarce

The breathing space between dollar crises used to be measured in years, but now it has been cut back to weeks. If last December's tumultuous plunge of the greenback was the worst since the currency upheavals of 1973, its place in the recordbooks was short-lived indeed. Last week the dollar bears were again on the prowl, clawing the bleeding buck to new and worrisome lows against the Japanese yen and nearly all the major trading currencies of Europe.

The dollar's worst performance came in West Germany, where it dropped nearly 4.4 pfennigs in one day, crashing below the psychologically important two-mark barrier before rallying slightly to close the week at 2.02. In Switzerland, the dollar rocketed between extremes of 1.88 and 1.75 Swiss francs within two trading days. The dollar even managed a distinction of sorts by hitting a 17-month low against the Italian lira, one of the world's weakest currencies.

Despite the dollar's steadying at week's end, no one could be sure the improvement would continue. The bleakest aspect of the fall is that no measures designed to strengthen the dollar seem to work any more. The U.S. at the start of the year began buying unwanted dollars to prop up their price; that intervention, which Europeans insisted was too brief, accomplished nothing. The Swiss in the past two weeks have taken a series of drastic steps to stop the rise of the Swiss franc against the dollar; among other things, they lowered interest rates to as little as 1%, imposed a 40% "negative interest" charge on certain foreign deposits of more than 5 million francs in Swiss banks --meaning that depositors must pay 40% a year for the privilege of keeping these accounts--and flatly forbade purchase of Swiss stocks and bonds by nonresidents. Those measures strengthened the dollar's exchange rate against the Swiss franc for all of two days.

The U.S. has tried to nag West Germany into pumping up its economy to reduce the trade surpluses that are prompting conversion of dollars into deutsche marks. The West Germans, fearing inflation, resisted so sternly that the best the U.S. has managed is an agreement under which Washington and Bonn will stop calling each other names in public.

What caused the latest convulsion?

There were numerous handy explanations. From Washington came the unsettling news that the nation's index of leading indicators slipped 1.9% in January, the biggest dip in three years, while inflation speeded up. From Europe came a newspaper interview with West German Economics Minister Otto Graf Lambsdorff, who said that he "could not exclude" the possibility of the dollar's sinking to 1.80DMs.

These were more excuses than reasons. Behind them remains the fundamental problem: the U.S., by spending more abroad than it earns, is spilling out dollars faster than foreigners can absorb them. The measure of that outflow is the nation's trade balance, and it has been deteriorating. Last week the Commerce Department announced that during January the U.S. imported $2.38 billion more than it exported. That was the biggest monthly deficit since last October and more than 40% larger than the January 1977 figure.

Washington at last seems to recognize that the dollar slide is not a problem that will go away or can be minimized. The more the dollar drops, the greater becomes the pressure for the U.S.'s trading partners to put up more import barriers to protect their home markets from cheap American products and the greater becomes the chance of a new world recession. The biggest worry of all is that OPEC will hike its oil prices to make up for the losses it is suffering selling oil for dollars that steadily lose value. Last week that fear looked suddenly real as Kuwait's oil minister, Sheik Ali Khalifa Al Sa bah, announced that his country is considering calling for an emergency OPEC meeting to discuss dissolving the current freeze on oil prices. State Department officials bravely pooh-poohed the Kuwaiti call as "blustering." Europeans were less sure. Said West German Economics Minister Lambsdorff: "What I'm afraid of most this year is having to pay 1.5 DMs for two things: a liter of gas and a U.S. dollar."

Unfortunately, Washington sees little it can do to prop the dollar, short of pushing the U.S. economy into a recession that would correct the problem of pulling in more imports, especially oil. The Administration is of course trying to get its energy bill out of a congressional conference committee and onto the statute books. But the bill has already been so watered down by Senate changes that even if it does ever pass, its effect will probably be more psychological than real.

The latest idea is to have the U.S. borrow billions of marks, yen, Swiss francs or whatever from private holders of those currencies to use in buying up dollars to support the price. Such borrowings would supplement the approximately $20 billion in other currencies that Washington can now borrow from foreign central banks to use in dollar-support operations. That might help--but foreigners hold an awesome $300 billion in greenbacks, many of which they could sell for other currencies if they lost all faith in the dollar's stability.

In his televised news conference, President Carter asserted that the dollar's agonies are being caused largely by traders' lack of perception of economic reality. He has a point: by any objective standard of purchasing power, the dollar is now grossly undervalued. A dollar, spent as a dollar, will buy more goods and services than the same dollar will buy when converted into, say, West German marks: a cup of coffee now costs an American in Germany the mark equivalent of 80-c- and a quart of milk $2.

Unhappily, currency markets reflect not only present purchasing power but future hopes and fears, and as long as they do so, the dollar, once a symbol of financial strength, is becoming something of a joke. One example: the drop of the dollar against the DM has made the 190,000 G.I.s stationed in West Germany that nation's newest poverty class. Last week NATO Chief Alexander Haig told congressional committees that some sympathetic West Germans are offering care packages of food and cigarettes to his soldiers. For World War II veterans who remember when a packet of American smokes bought a night on the town in the war-shattered Reich, that is indeed a bitter reflection of the dollar's plight.

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