Facebook Twitter

HIGH-FLYING DOLLAR BODES ILL FOR EXPORTS, BUT FALLING INTEREST RATES SHOULD HELP

SHARE HIGH-FLYING DOLLAR BODES ILL FOR EXPORTS, BUT FALLING INTEREST RATES SHOULD HELP

Both the dollar and the stock market are flying high, but for how long?

The economy is slowing, and the dollar is so high that our exports will dry up faster than a wheat crop with no rain.At the start of this year, experts widely acknowledged that a lower dollar helped to stimulate exports and reduce our trade gap. The group of seven industrialized nations supposedly targeted the greenback's value at about 130 yen, but many felt the buck should be worth only 100 yen. As the dollar fell, our goods became more affordable overseas, and we sold and shipped more.

Then a funny thing happened on the way to the central bank: In 1989, the dollar started to climb, reaching two- and three-year highs (depending on the currency). Initially, the buck was riding on the back of the Fed's tighter monetary policies. Analysts rejoiced.

Unfortunately, our goods are becoming too expensive to export, and three years of manufacturing gains are evaporating.

Our domestic economy is weakening. U.S. manufacturers and builders have yet to recover from the strain of higher interest rates. Auto manufacturers are coming out with layoffs as sales fall. Retailers in general are seeing consumers tighten their purse strings.

Is help on the way? We think so.

Since March, interest rates have been falling. The dollar will follow their lead. If the greenback charges south too quickly, don't be surprised if the boys on Wall Street panic and jump ship.

However, when the dust settles the economy should do well in the fourth quarter. Lower interest rates will encourage consumers to spend, and spend they will. Their lack of buying has pushed consumer savings to record levels, while creating a pent-up demand for products.

-A financial perspective

In the short run, the risks of a falling stock market seem to far outweigh the potential for stock gains. When the stock market falls, there should be some good buying opportunities because the economy will be fundamentally sound.

-Economic indicators

What may now appear to be the start of an inflationary cycle may be the last gasp before a deflationary turn. Oil prices are sliding, and farmers are getting more rain than originally anticipated. Inflation will not seem as threatening by September.

The consumer price index (CPI) jumped 0.6 percent in May, compared to a 0.7 percent increase in April. Excluding volatile energy and food costs, consumer prices increased 0.5 percent in May after rising a slim 0.2 percent in April.

In a separate report, the Labor Department said average hourly earnings rose a slight 0.1 percent in May.

The U.S. gross national product grew at a 4.4 percent annual rate in the first quarter of 1989. However, more than half of this gain was the result of a rebound from last summer's drought. Discounting this one-time statistical change, growth slowed dramatically. The non-farm economy grew at a dismal 1.9 percent annual rate, compared to a 3.5 percent rate in the last quarter of 1988.

Housing starts fell 2.1 percent in May, the fourth consecutive monthly decline. Housing starts are now at their lowest level since December 1982.

Building permits in May were up 0.1 percent, but new permits for the construction of single-family homes dropped 4.4 percent.

-Mortgages and consumer loans

Mortgage interest rates continued to drop. The average 30-year fixed-rate loan cost 10.25 percent, down from 10.35 percent last week. Fifteen-year fixed loans declined to 10.04 percent from 10.13 percent, and ARMs fell to 9.24 percent from last week's 9.29 percent.

Auto loans were a bit lower. The average 48-month new car loan inched down to 12.34 percent from 12.35 percent. The average 36-month new car loan fell to 12.14 percent from 12.16 percent.

-Consumer savings yields

Yields on most certificates of deposit dropped this week. The 90-day CD yield remained unchanged at 8.57 percent, but 6-month CDs fell to 8.90 percent from last week's 8.95 percent. The yield on the 42-month CD declined to 8.81 percent from 8.88 percent, while the 10-year CD yield dropped to 8.75 percent from 8.84 percent.

Reader questions will be answered and may appear in this column, when mailed to Gary S. Meyers at 20 West Hubbard St., Chicago, IL 60610.