Too Strong for Its Own Good

The surprisingly robust dollar is a source of pride and problems

When University of Chicago Professor George Stigler travels to Stockholm next month to accept the Nobel Prize, he will experience firsthand a bittersweet phenomenon of the U.S economy. Stigler's Nobel Prize carries a cash award of 1.15 million Swedish kroner, which until only a few weeks ago was the equivalent of $182,000. Since then the Swedish government, pressed by the rising value of the U.S. dollar as well as its own economic problems, has devalued the krona. When Stigler finally receives his award, he will actually get only about $155,000.

The dollar has been on an upward vector against nearly all the world's major currencies for a full two years, confounding predictions of bankers, businessmen and economists alike. They fully expected the greenback to begin weakening this year as interest rates fell, because much of its strength derives from the massive inflow of foreign capital attracted by the high returns on U.S. investments. Instead, the dollar has kept getting stronger, largely because inflation has been declining so rapidly in the U.S. and returns are still high compared with those in other countries, where interest rates have also dropped.

Another reason for the inflow is that the U.S. is seen as a safe haven for foreigners' capital. International tensions have been heightened by currency controls, instability in Latin America and troubled economies in Europe. As Joly Dixon, Counselor of Economic Affairs for the European Community, asks bluntly, "Where else are you going to put your money?"

The U.S. consumer has prospered widely from these developments; the same size budget can now buy more Italian wines or French food processors. Life is also sweeter for American tourists traveling abroad (see box). Importers and corporations that buy raw materials from overseas have seen their costs cut dramatically. But the strong dollar has been a disaster for American exporters of everything from textiles to computer terminals, because it translates to foreign buyers exactly like a hefty price hike.

With importers having a field day in the U.S. and American exporters stymied abroad, the merchandise trade gap has widened. Last week the Commerce Department announced that the September deficit amounted to just over $4 billion. While this is an improvement over August's record shortfall of $7.1 billion, the overall trend has led to expectations of a merchandise trade deficit of $43 billion this year, the worst ever, and an even larger one in 1983.

The merchandise gap is now more than offset by U.S. surpluses in other international transactions. The U.S. sells more services abroad (such as those of engineering and construction firms) than it buys. Moreover, despite the large inflows of foreign capital, the U.S. still earns more from its foreign investments (in dividends and interest, for example) than it pays out. But some economists expect the merchandise deficit to rise so much that it will offset the surpluses elsewhere in the U.S. balance of payments.