How To Salvage The Sinking Dollar

As if the anemic U.S. economy didn't have enough problems, add a sinking dollar to the list. The greenback has dropped some 20% against the German mark in the last year, hitting a record low. Against the yen, the dollar is down some 8.5%. This is good news for U.S. exporters, mainly commodities producers, who use price as their major competitive tool. But a weaker dollar feeds inflation domestically and forecloses the Federal Reserve from pushing interest rates lower--about the only way to get the sagging economy going.

What is needed is a concerted effort by policymakers on both sides of the Atlantic. The fiercely independent German central bank, the Bundesbank, has pegged interest rates at a high level--just under 10%--in order to damp down the inflationary pressures let loose by the huge costs of the unification of the two Germanies. That means international investors simply can't justify the six-percentage-point penalty they pay for choosing dollar-denominated investments such as Treasury securities. And since the European Monetary System requires France, Italy, and others to keep their currencies in line with Germany's, the whole Continent is a strong lure for investors right now. The Fed would condemn the dollar to outcast status by cutting rates now.

It's no accident that the flight from the dollar reached stampede proportions after President Bush unveiled his economic program at the Republican convention. The international money markets are reacting--sensibly--to the fact that neither Bush nor Clinton seems willing to enunciate a credible economic program. The markets don't want election-year fluff.

A way must be found to break this policy gridlock, with both sides giving a little. Surely, everyone will benefit if the two U.S. Presidential candidates spell out believable, specific details on how they are going to pay for their proposals, together with ways to cut existing programs. Then, the Germans could be shown an alternative way to check those inflationary pressures--perhaps through international credits from the International Monetary Fund or other lending organizations, so that they are not putting all of the cost of unification on their own books. Given that kind of elbow room, the Bundesbank would have the reassurance it needs before it moves to lower those disruptively high interest rates.

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