The Dollar's Slide May Have A Way To Go

If you want to get a rise out of Ruud P. Roggekamp, manager of foreign exchange and derivatives at Chicago's FMC Corp., mention the plummeting greenback. "It's stupid that the dollar is weakening," fumes Roggekamp. "I can see no fundamental reason for it."

Indeed, the U.S. economy is growing nicely, especially compared with the fledgling recoveries under way in Japan and Germany. And U.S. interest rates are rising. Add it all up, say American executives, Clinton Administration policymakers, and economists, and you should get a strengthening dollar.

Try telling that to foreign exchange traders around the world. Since mid-April, they have pushed the dollar down 5% against the German mark. On May 3, they drove it perilously close to "penny parity" with the Japanese yen--a record-low 100 to the buck (charts). The plunge forced the Federal Reserve and other central banks to buy billions of dollars on the open market a day later, the second round of official intervention in only a week.

In fact, after talking the dollar down last year, and then doing little in subsequent months to change the impression that it wanted the currency to weaken to help curb Japan's trade surplus, the Clinton Administration has had a foxhole conversion. Washington now seems possessed by a fear that a run on the greenback would trigger the third global bond-market meltdown in as many months. That would push U.S. long-term interest rates higher and could wreak havoc in Japan and Germany. "This Administration sees no advantage in an undervalued currency" Treasury Secretary Lloyd M. Bentsen said in a statement. Adds another senior Administration official: "Enough is enough."

But many dollar bears are not yet willing to concede that point. And even some Fed insiders, critical of the Administration's earlier unwillingness to stabilize the dollar, think that trying to prop it up now will prove futile.

The dollar bears remain worried about the Fed's apparent reluctance to risk slower growth by staving off future inflationary pressures with more aggressive interest-rate hikes. They are unimpressed by the inflation-fighting credentials of Council of Economic Advisers member Alan S. Blinder and University of California at Berkeley labor economist Janet L. Yellen, the President's nominees for the Federal Reserve Board. And they are disturbed about the possible inflationary impact of President Clinton's aggressive trade policies toward Asia. To the bears, nothing short of more Fed rate hikes can save the dollar from a scary new dive.

And many traders think the Fed will respond by continuing the round of tightenings it began in February. "They may have to move quickly," says former Fed Governor Wayne Angell, now chief economist at Bear, Stearns & Co. That could mean raising the discount rate, which has been stuck at 3% since July, 1992, by a half a percentage point. While that might rattle the bond market, the impact would be nothing compared to the effects of a free-falling dollar. Noting how the plunging greenback was pummeling bond prices just before each of the Fed's recent interventions, Bernard G. Schaeffer, president of the Cincinnati-based Investment Research Institute Inc., estimates that bearish sentiment among fixed-income traders "is cataclysmic. We don't need another downward cascade."

Record lows. As May 4 dawned, however, that seemed likely. With Japan's markets closed for the long Golden Week holidays, the dollar had skidded to 100.90 yen in New York the afternoon before, and headed even lower overnight in Europe. So, as U.S. markets opened, the Fed and its allies struck. But with Japan facing political gridlock and mounting trade tensions over its $130 billion current-account surplus, the greenback's value could still slide an additional 10%, some bears say. "Once we break 100 yen, the dollar could fall very quickly to 90," says Miron Mushkat, Hong Kong-based chief economist for Lehman Brothers Asia Ltd.

Who would benefit from a continued slide in the greenback? Try Hong Kong, Thailand, and other low-wage Southeast Asian exporters. With their currencies closely following the dollar, they could see a big investment boom from Japanese manufacturers fleeing the high yen. That could cost thousands of Japanese workers their jobs, warns Sony President Norio Ohga. He wants to see Washington and Tokyo push the buck back to 120 yen. But Ohga likely will be disappointed. Trade talks between Tokyo and Washington have broken down. And new Prime Minister Tsutomu Hata seems unable to achieve political reforms. No wonder traders are piling into the yen.

German investors are shunning the dollar, too. Economist George Magnus of S.G. Warburg Group figures that the dollar could slip 7% from its current level, to around 1.52 marks, by summer.

Why? Germany, says Prudential Securities economist C. Michael Aho, "could be picking up faster than most people expect." Indeed, improving factory orders, production, and profits could keep the Bundesbank from cutting rates much further. Thomas Mayer, chief economist at Goldman, Sachs & Co. in Frankfurt, expects to see the Bundesbank cutting rates by a quarter of a point by this June. But by the end of 1995, three-month German interest rates, now at 5.3%, could be back up to 5.6%. "The Bundesbank," he says, "has probably come to an end of monetary easing."

Such forecasts can't help but bolster the cause of the dollar bears. "We really do believe the dollar is fundamentally undervalued," says Colgate-Palmolive Treasurer Brian J. Heidtke. That is also the line that the Clinton Administration is pushing. Whether traders buy it is anybody's guess.

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