Just last April, the U.S. dollar seemed helplessly locked in a death spiral, sinking almost daily to record lows against the yen and other major currencies. The prospect of a brutal trade war with Tokyo and a weakening U.S. economy convinced foreign exchange traders that there was no bottom in sight to the greenback's free fall.
But the dollar's long fall may at last be ending. In the past four months, it has made an impressive comeback--rising 15% against the yen and 5% against the German mark. Although still far from the 125-yen level that President Clinton inherited in 1993, the dollar has regained so much favor of late that some currency experts boldly predict that it could top 100 yen by yearend.
What's fueling the dollar's rebound? Sparking the turnaround have been carefully coordinated interventions in exchange markets by the Bank of Japan, the Federal Reserve, and other central banks, moves by Japan to shore up its struggling financial sector, and rising prospects that Congress will finally slash its budget deficit.
"GOOD COP." But the more fundamental explanation isn't macroeconomic but psychological: a growing belief in the markets that the Clinton Administration has made a quiet but significant shift in its Japan policy. Long convinced that the Clintonites wanted a weaker dollar in order to extract trade concessions from the Japanese, Wall Street now accepts U.S. claims that it favors a stronger currency.
Indeed, investors view the Clinton Administration's recent dollar-bolstering moves as part of a broader change in its attitude toward Tokyo--from confrontation to conciliation. "I think the Administration realizes it pushed too far with Japan," says Nicholas Sargen, a market strategist at J.P. Morgan & Co. "After the bitter trade dispute over autos, the U.S. now wants to play `good cop' with Japan."
While Clinton aides publicly insist that they have not altered their Japan strategy, some senior advisers privately acknowledge that the Administration does intend to adopt a more moderate policy. "We are turning nicer, but nobody will admit it," confides one top official. Why? White House polls indicate that Japan-bashing remains a political plus for Clinton.
With a weak dollar exacerbating Japan's financial woes and raising the specter of bank failures, Washington and Tokyo have intensified their coordination in recent months. Eisuke Sakakibara, the top international official in Japan's Ministry of Finance, now consults at least weekly with Treasury Dept. Under Secretary Lawrence H. Summers or his aides.
The result: By carefully orchestrating currency interventions to coincide with Japan's announcements of financial reforms, the two governments have pushed the dollar up sharply. An Aug. 2 joint intervention that followed new rules permitting more Japanese foreign investment sent the dollar up 3%. "The growing belief is that we have a blank-check intervention policy by the U.S. and Japan," says William P. Sterling, a strategist for BEA Associates. "Given that, very few people want to short the dollar." Meanwhile, Japanese officials clearly are leaning on the insurers and other institutional investors to purchase U.S. treasury bonds and other securities in order to take some pressure off the yen.
EXPORT POWER. The greenback's newfound strength isn't likely to affect U.S. competitiveness--at least not yet. John Praveen, international economist at Merrill Lynch & Co., believes U.S. exporters still have an edge over foreign rivals because unit labor costs for American companies have risen more slowly in recent years. "Even at 100 yen, the U.S. remains quite competitive," says Praveen.
The Clintonites also have a self-interest in driving up the dollar. With the economy slowing, a stronger greenback gives Fed Chairman Alan Greenspan more of a cushion to cut interest rates--and sustain the expansion through the 1996 election--without fear of a further run on the U.S. currency. Similarly, the stronger dollar could give Germany's Bundesbank room to nudge down interest rates--providing a needed boost to the global economy.
Still, some market operators warn that the dollar's swoon will persist until the U.S. reduces its gaping $160 billion current-account deficit. "Until you get at the root causes of the dollar's weakness, you're not going to stop the longer-term slide," says Amy Smith, a senior currency strategist for IDEA Associates. "This may be just a brief reprieve."
Perhaps. But if the greenback's surprising rebound buys time for the U.S. and Japan to get their economic houses in order, then the currency's climb may be durable.