January 26, 1997
As Dollar Rises, Treasury Policy Raises Questions
Related ArticlesJapan's Economic Report Card: Where Did the A's and B's Go? (Jan. 24) As Dollar Rises, U.S. Auto Makers Feel the Pain (Dec. 6) For Japan's Automakers, a Windfall From Yen's Value (Nov. 9)
By DAVID E. SANGER
ASHINGTON -- Almost every day for the past two years Treasury Secretary Robert Rubin has repeated the same line whenever he was asked about the U.S. currency. "A strong dollar," Rubin would repeat, almost mantralike, "is in the interest of the United States."
Now, some people are wondering whether Rubin's unrelenting support for the dollar has been a bit too unrelenting.
The dollar has soared in recent weeks, touching 120 yen late Thursday before falling back a bit Friday. That puts the currency up 50 percent from the low of 80 yen to the dollar nearly two years ago, and many analysts, after repeatedly predicting that the dollar would soon start to weaken, now expect the rise to continue for at least a while longer. The dollar has not been this strong against the Japanese yen for nearly four years.
The dollar has also risen steadily against the German mark, the most important European currency, reaching a 31-month high of about 1.63 marks, up about 14 percent from the beginning of 1996.
A rise in the dollar tends to make American goods more expensive abroad and foreign goods a better bargain in the United States. It also makes it less expensive for American travelers visiting other countries.
That low for the dollar two years ago created the first test of wills between Rubin and the currency markets. Rubin won.
But in world finance, there is no such thing as pure victory. So even while the Clinton administration declares that the rise of the dollar is a long-delayed vote of confidence in America's renewed economic strength, Rubin finds himself under attack by two groups who usually agree on almost nothing: Japanese officials and U.S. automakers.
Japanese officials say they are appalled by the pace at which the dollar has soared, even though it makes their goods far more competitive around the world. They see the flight to the dollar as worrisome evidence that investors around the world are giving up on Japan, concluding that the country may be hopelessly mired in its economic troubles for some time.
In search of higher returns, investors are heading to the United States, figuring that its markets, even at these lofty heights, are a better bet than Japan or Europe.
So while Rubin has repeated his standard fare this week, his counterpart in Japan, Finance Minister Hiroshi Mitsuzuka, has sounded a different theme. "The yen's excessive fall against the dollar is undesirable," he said on Friday in Tokyo.
For once, Mitsuzuka has many allies in Detroit. And the U.S. automakers have been pounding on the Treasury's door, warning the administration of a host of disasters in the offing: a revival of the trade deficit with Japan, a loss of all the ground U.S. automakers have made up against Japanese competitors, and perhaps a round of "cost-cutting measures" -- a veiled warning of layoffs.
Without question, the weak yen has enabled Japanese car makers to keep their prices stable or even to lower them a bit, while General Motors, Ford and Chrysler have raised their prices for the new model year. That is good news for consumers.
But Richard Wagoner, the president of the GM's vast North American automotive operations, said early this month that he would like to see the yen strengthen to about 90 yen to the dollar. His hopes appear likely to be dashed.
"We're concerned by the yen," Wagoner said in a recent interview. "There's no justification for the valuation."
In Washington and on Wall Street, though, plenty of justifications are being voiced every day. The rapid reduction of the federal deficit, U.S. officials say, has made the dollar more attractive than ever. Higher interest rates in the United States make investing in Treasury bonds and other financial instruments look more promising, and if anything, analysts say, rates are likely to rise further in the United States while they are expected to remain low in Japan and could fall even further in Europe.
"The dollar's performance reflects basic economic fundamentals," Bruce Steinberg, an economist at Merrill Lynch, said Friday. "The U.S. economy remains vibrant after six years of expansion, the Japanese economy remains gripped by deflation and financial-sector problems, and European economies are struggling to grow."
Blunting the complaints from Detroit and elsewhere, administration officials note that the rise of the dollar benefits the U.S. economy in several ways. Imports help keep prices down and thus contribute to keeping inflation under control. And by keeping inflation down, they add, imports help reduce the pressure on the Federal Reserve to raise interest rates.
(They will say none of this on the record, of course, because that is solely Rubin's purview -- and in public or private, he says very little.)
And then there is the most intangible benefit of all: how the dollar's strength translates into diplomatic strength. Foreign policy practitioners differ greatly on this subject. But it never hurts to go into negotiations with another country armed with a currency that is viewed as on the rise. And that is how the markets view it.
"The speed of the recent U.S. dollar surge may be promoting some official worries in Frankfurt and Tokyo," Salomon Brothers, the Wall Street investment firm, told its clients this week, "but no credible plans to halt the rise appear in store."
Still, it can be dangerous to measure national economic strength solely by the relative values of currencies. When the dollar was exceptionally strong in the mid-1980s, it masked tremendous inefficiencies in U.S. factories and only added to the problems of industry by pricing many U.S. goods out of world markets.
And when it hit bottom two years ago, the U.S. economy was creating jobs, a stock market boom was gathering steam, and Japan was still mired in recession and bankruptcies.
But as a measure of perceptions about the future of economic stability, the foreign exchange markets are often a telling indicator. And what they are indicating these days is that investors around the world find the United States the best haven.
They are nervous about investing in Europe, which plans to move to a new currency, the Euro, in just two years -- eliminating the traditionally rock-solid Deutsche mark as an investment instrument. And whatever luster Japan had left was wiped out, deservedly or not, by the 11 percent drop in the Tokyo stock market since the beginning of the year.
"In today's world, it is no longer Japan Inc., it is U.S.A. Inc.," said Allen Sinai, the chief global economist of Primark Decision Economics, an economic advisory firm.
"There is a perception in Europe that the American economy, and its political and corporate fabric, is the best in decades," Sinai said. "And there is a hope that the strong dollar will eventually help growth pick up around the world."
That is part of the problem for Washington, however. Japan's traditional way of reviving its economy is to increase exports, raising its trade surplus with the United States. That, in turn, can intensify the political heat on Capitol Hill, especially if the U.S. economy cools off.
"The Japanese are a bit confused these days," one American who deals often with Japanese officials said this week. On the one hand, Japanese companies will reap large profits if the yen stays weak. But on the other, the Japanese are fearful of any signs that their own investors are losing confidence in the yen and fleeing to the United States.
Europeans share the same fear. A severe slowdown in Europe could prompt more doubts about the viability of a single European currency.
Another reason for the rise is the constancy of Rubin's comments. He has noted that repetition of the same phrase may invite parody, but it also creates an atmosphere of stability, making speculators hesitant to bet against the dollar.
Despite the complaints from Detroit, there has been relatively little political pressure so far on the administration from manufacturers who fear that the high dollar will hurt their exports.
For one thing, a lot of U.S. businesses benefit from the rise. Companies with little fear of foreign competitors, like Microsoft and Intel, make greater profits on their overseas sales. Wall Street benefits, too, because it lures a torrent of foreign investment.
But Detroit is a different story. And from the executive suites of the Big Three automakers to the offices of the city's cultural leaders, there has been growing concern as the dollar has crept higher.
Chrysler Corp. chairman and chief executive Robert Eaton said all he wanted was for the administration to pressure Japan to stop big purchases of Treasury securities, purchases that tend to drive up the dollar. "We've been doing nothing more than asking our government to get them to stop intervening," he said Wednesday.
It could be a long wait.
Copyright 1997 The New York Times Company
