GREEN LIGHT FOR THE GREENBACK
Why the dollar should stay strong
A specter is haunting the financial markets: fear that a withdrawal of foreign capital from U.S. fixed-income securities could topple the buoyant dollar, causing interest rates to surge and roiling stock and bond markets.
Inspiring such fears is what some see as a potentially dangerous buildup of foreign holdings of U.S. Treasury securities. David Hale of Zurich Kemper Investments estimates that net foreign purchases of such securities exceeded $200 billion last year, compared with an average $51 billion a few years ago. As a result, foreigners--mainly central banks--now appear to hold more than 30% of all marketable Treasury debt.
Hale is one economist, however, who doesn't think foreigners are about to disgorge U.S. securities anytime soon. "The reasons that prompted dollar investments are still compelling," he says.
To bolster Japan's still-fragile recovery, notes Hale, the Bank of Japan has loaded up on Treasuries, causing the yen to fall from 80 per dollar in early 1995 to 118 recently. With a sagging stock market and large tax hikes ahead, Tokyo will want to keep the yen from appreciating for many months to come.
Meanwhile, Europeans are contending with sluggish economies and a rocky road toward European Monetary Union. And because of the fiscal constraints imposed by EMU membership rules, their only available policy instruments to promote growth are lower interest rates and currency depreciation--a policy stance that Hale says is unlikely to change until a broad-based European recovery is firmly in place.
The other big buyers of Treasuries have been the central banks of developing countries, whose foreign reserves have soared because of trade surpluses and/or investment inflows. Because of the liquidity, depth, and transparency of U.S. financial markets, argues Hale, these nations have little choice but to hold the bulk of their growing reserves in dollars for some time to come.
To be sure, within the next decade, both a new European currency and the yen could well challenge the dollar's role as a reserve currency. But Hale thinks that the radical adjustments needed to achieve such ends are actually likely to increase dollar demand in the interim. And that prospect, plus continuing sluggishness overseas, suggests that the dollar will stay strong for another year or two--and possibly far longer.By GENE KORETZReturn to top
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WHAT KEEPS CEO PAY DOWN?
High social status in the boardroom
Shareholders upset by the huge compensation packages some CEOs are garnering might do well to make sure that board members of their companies --especially the heads of compensation committees--are of high social status.
That's the implication of a recent study of CEO pay by Maura A. Belliveau of Duke University, Charles A. O'Reilly of Stanford University, and James B. Wade of the University of Illinois. The study found that pay levels at 61 major corporations in the mid-1980s had virtually nothing to do with the CEO's job tenure or college degrees and were only modestly related to company profitability. What did affect pay levels, however, was the social status of the compensation committees' heads--as measured by the corporate boards they sit on, the social clubs they belong to, and the prestige of the college they went to.
In general, the higher the social standing of the compensation chair, the lower the CEO's pay--especially if there is a difference in their social standings. When both enjoy high social status, the dampening effect is small. But all else being equal, a high-status compensation chair doles out about 17% less to a low-status CEO than a low-status compensation head to a high-status CEO.
"Our findings," say the authors, "suggest that shareholders are well served by compensation chairs of high social status, since they are better equipped to resist undue CEO influence."By GENE KORETZReturn to top