Living: Bullish About the Buck

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Every American tourist planning a summer swing through Europe or a fall trek through the Himalayas has to be anxious about one thing: the value of the dollar. Many booked the trip of a lifetime because the dollar was so strong, and they are afraid that the great bargain might turn into a budget buster.

In recent years the American currency has been on a joyride on world money markets. During the late '70s, foreign-exchange traders nicknamed the dollar "the downhill racer" because it was slipping and sliding so fast. Since 1980, however, it has been on a march upward. The dollar reached its peak in late February, when it was worth 10.59 French francs, 3.46 West German marks and 2,164 Italian lira; just $1.03 bought a British pound. In recent weeks the dollar has fallen from those dizzy heights, and last week it slid some more. It averaged 9.49 francs, 3.11 marks and 1,988 lira; the price of a pound rose to $1.23. If tourists are confused by the dollar's ups and downs, they are not alone. World financiers and economists do not fully understand what has been happening either. Moreover, the so-called experts have been almost uniformly wrong in predicting the dollar's course during the past four years. When they were saying that it would certainly soon fall in value, the dollar kept right on rising.

The American currency has been strong for the past few years basically because foreigners see the U.S. as a good place to put their money. Economic growth in this country has been high (6.8% in 1984) and inflation low (4%) at a time when much of the rest of the world trailed anemically behind and faced more rapidly rising prices too. In addition, American interest rates have been higher than those abroad because of the large U.S. budget deficit. Since foreigners can earn 2 to 4 percentage points more after inflation by investing their money in the U.S. rather than in, say, France or West Germany, they have been selling francs and marks to buy U.S. Government securities or to make other American investments.

The dollar's strength has been a mixed blessing for the U.S. economy. On the positive side, it not only has been a boon for tourists but has also helped reduce inflation by holding down the price of American goods that compete with imports. Howard Rosen, an associate at the Institute for International Economics in Washington, calculates that inflation for last year alone would have been 7% if the dollar had not been strong; instead prices rose only 4%. In addition, foreign funds attracted by the strong dollar have helped the Administration finance its $200 billion budget deficit. Without all that imported money, the U.S. would now have much higher interest rates.

But there is a dark side to the strong dollar. American tourists frolicking in London's Piccadilly Circus or Rome's Via Veneto will get no good wishes from Midwestern farmers or machine-tool producers in the East. The strong dollar has made American goods more expensive on foreign markets and hurt U.S. employment by depressing export sales of everything from Iowa corn to film made by Rochester's Eastman Kodak.