Falling Back to Earth

During the first half of the 1980s, the value of the U.S. dollar seemed to be going into orbit. While American consumers enjoyed cheap imports and luxuriated in foreign travel bargains, U.S. manufacturers complained bitterly that they were being clobbered by overseas competitors. But early last year the dollar bailed out, with a slight push from anxious international moneymen. At first the decline was a gentle drift, but it is now showing signs of becoming a free fall. Since December the dollar has dropped by 19% against the Japanese yen and 8% against the West German mark. It dipped last week below 180 yen for the first time since October 1978, when the American currency seemed so feeble that President Carter announced a dramatic rescue plan. Economists now wonder whether the current decline will end in a soft landing or a painful crash. Says Alan Greenspan, a New York City economic consultant: "There is an increasing danger now that the dollar's fall may prove to be as big a problem to the U.S. as its climb."

Much of the dollar's dive can be traced to a meeting held last September at Manhattan's Plaza Hotel by finance ministers and central bankers from the Group of Five, consisting of Britain, West Germany, France, Japan and the U.S. Deciding that the dollar was overpriced, the officials agreed that their countries would sell dollars on foreign-exchange markets in a coordinated effort to bring down their value. The plan worked, but it may have proved too successful.

Washington's top moneymen seemed to disagree last week about the best course for the dollar. Treasury Secretary James Baker told Congress that the Reagan Administration "would not be displeased" with further declines, provided that they were "orderly." But Federal Reserve Chairman Paul Volcker testified that the currency has already "fallen enough." Added Volcker: "I don't want to see a loss of confidence in the dollar."

Experts agree that a falling currency, like a rising one, offers both opportunities and perils. By making American companies more competitive with foreign rivals, it should help shrink the U.S. trade deficit, which hit a record $148.5 billion last year. Narrowing that gap would create jobs and boost the gross national product. Government figures released last week showed that the GNP grew at an annual rate of only 1.2% in the fourth quarter of 1985 and 2.3% during the year as a whole, the smallest increase since 1982. The weakening dollar will also reduce demands that Congress take protectionist action against imports.

The decline, though, has brought higher costs for foreign goods and overseas vacations. Sony recently raised prices by 5% on its entire line of color television sets because of the falling dollar. A 19-in., remote-control model, for example, now costs $630, vs. $600 in December. Prices of Japanese cars and machine tools have also risen by 5% since December. Last week the American subsidiary of West Germany's Mercedes-Benz added 5.8% to the sticker price of its autos. Pouilly-Fuisse, a popular white burgundy that sold in stores for about $12 in 1985, now goes for as much as $15 for a bottle of the same age and quality.