Facebook Twitter

DON’T PANIC OVER THE FALLING DOLLAR

SHARE DON’T PANIC OVER THE FALLING DOLLAR

Just when it looked as if the Federal Reserve Board might get out of its painful habit of repeatedly ratcheting up interest rates, investors and consumers have new reason to start feeling nervous again.

Despite further signs of strength in the economy, the dollar plunged this week to a post-World War II low against the Japanese yen and the lowest level in more than a year against the German mark - triggering a global selloff in stocks and bonds.This strange situation defies conventional economic wisdom, which holds that when a country's economy is strong it attracts investment and its currency should rise in value against currencies of other countries.

What caused the dollar's decline? The diagnosis varies from "expert" to "expert." Some blame the problem on a worldwide case of inflation jitters. Others say it reflects a lack of confidence in the Clinton administration's foreign policy, particularly trade negotiations with Japan.

But whatever the reasons for the dollar's decline may be, it sends a signal of weakness about both the administration and the nation as a whole. And it puts both the White House and the Federal Reserve in a tough spot with no good options. Just letting the value of American currency keep declining would be inflationary, making imports more expensive. If the dollar's decline worsens, the Fed may feel compelled to raise interest rates to try to defend the currency. But higher interest rates would slow the current recovery.

Despite all the difficulties, there's no reason to panic. The dollar's drop, though sharp, has come in an orderly market. While the dollar's purchasing power abroad has been weakened, importers so far have been absorbing higher costs for cars, appliances and other items.

Moreover, the dollar remains the world's second strongest currency, just behind the Japanese yen but ahead of the German mark. When the dollar loses some strength, this development can help U.S. exports by making them more affordable overseas. More exports, in turn, can reduce the deficit in the U.S. trade balance and spur domestic employment.

The bottom line is that market crises come and go. So do various administrations in Washington, some weak, some strong. But as long as the American economy remains as relatively free and fundamentally sound as it is, investors and consumers can remain confident about the long-range future.