Heavyweight Champ

Add one more to the list of myths exploded by the record U.S. boom. Remember when any unemployment rate lower than 6%, or any rise in national output of more than 2.5%, was supposed to light a bonfire of inflation? Come on, it wasn't that long ago--those beliefs died even harder than the '80s idea that the U.S. was becoming a corporate colony of Japan. And as late as the end of 1998, some economists feared that a ballooning U.S. trade deficit and the launch of a rival international currency, the euro, would send the American dollar into a headlong slide--maybe even a "dollar crisis."

What has happened is the exact opposite. Far from becoming dangerously weak, the dollar, if anything, may be a bit too strong. So far this year it has risen about 6% on average against the currencies of the 19 most important U.S. trading partners. In May the greenback hit a four-year high against the British pound, while the euro, introduced 17 months earlier at a price of $1.17, fell briefly below 90[cents].

The development is great for U.S. tourists abroad; especially in Europe and Canada, they will need fewer dollars to buy a hotel room, a dinner, a bus ride or whatever. But it may also seem especially mystifying because America has been spilling more dollars abroad than pessimists feared. The U.S. deficit on current account, which measures all sorts of money flows--merchandise imports vs. exports, trade in services, tourist spending, investment flows--jumped more than 50% in 1999 to almost $339 billion. This year it seems headed higher still, to around $400 billion. In theory that creates an excessive supply of dollars in the world. Like an excessive supply of wheat or anything else, that ought to drive down the international price of a buck.

As with so many other things these days, though, classical theory is being rewritten by the sheer strength and dynamism of the American economy. Not only is the U.S. growing faster than any other major nation, but it is also enjoying a surge in productivity that promises to keep growth going well into the future, if a bit less exuberantly than today. And, for all Federal Reserve Chairman Alan Greenspan's fears of renewed inflation, price and wage increases have not eaten up any significant part of the gains.

Accordingly, the U.S. right now is the best place in the world to invest. So foreigners are sending back to the U.S., as investments, many of the dollars they accumulate in trade and other business dealings. That trend keeps global demand for dollars high enough to balance--or even outbalance--the increased supply.

Just under $151 billion of net direct investment--money to build plants or buy companies--poured into the U.S. last year, mostly from Europe. An additional $160 billion net, again mostly from Europe, flooded into purchases of U.S. corporate bonds; overseas investors actually snapped up more than two-thirds of all this debt issued in 1999 by American corporations. In 1998 U.S. buying of foreign stocks exceeded foreign purchases of American shares, but last year the balance swung the other way, pulling $108 billion more into the U.S.