The dollar hit new lows against the German mark and Japanese yen this week, setting off needless calls for government intervention. The Clinton administration wisely held off.
True, a stronger dollar would make imports cheaper and reassure foreign investors. But the policy that could turn the dollar around - a stricter monetary policy - could also suffocate an already slowing economy. The price of intervention is too steep.There are many theories why the dollar is falling, none convincing. Some say the slide reflects large trade deficits, fiscal imbalance or other structural problems. But these long-term factors did not suddenly worsen last week. Or the slide may reflect dismay over Mexico or short-lived fads and fears. No one knows.
The key facts are that the American economy is growing briskly and that current policies are sound. The Federal Reserve Board has steered the economy along a path of growth and low inflation. Over the past few years, Washington has cut the deficit, as a percentage of national income, in half. There is no crisis.
There is also no simple way to affect exchange rates. The Federal Reserve tried to stanch the dollar's slide last week by joining forces with other central banks to buy dollars; the tactic didn't work. The Fed could make a dent if it shifted its monetary policy to drive inflation lower and interest rates higher. Such a shift could persuade investors to buy dollars to invest in America. But monetary contraction poses a serious danger. The Fed raised interest rates last year to bring the growth rates down from unsustainable levels of over 4 percent. Further tightening could tip the economy into stagnation or recession - for little real gain.
A higher dollar would raise living standards a bit by lowering the cost of imports. It might help keep overall inflation lower. It might reassure foreign investors that America would remain a safe place to invest. But all these results would be modest because foreign trade and foreign investment account for only a modest portion of American economic activity.
Mickey Levy, chief financial economist at NationsBank, notes that when the Fed fought off a falling dollar in 1987 with tight monetary policy it helped trigger a collapse on Wall Street.
The economy is sound. So too is Fed policy. In this context, a falling dollar poses no crisis. Intervention might.