The dollar is back from its recent depths, buoyed by allied successes in the Persian Gulf and hopes for an economic rebound at home. The sudden rally has come as a surprise to currency traders, confounded some forecasters and begun to worry government finance officials because of its potential impact on exports.
In just seven weeks the dollar has leaped 17.9 percent against the German mark and nearly as much against other currencies, ending a 17-month downturn that brought it to historic lows against the mark and the Swiss franc and near record lows against the Japanese yen.
After hitting bottom at 1.4475 marks on Feb. 11, the dollar surged on the war news, stirrings of economic life in the United States and hopes for falling interest rates abroad. Yesterday, the dollar ended at 1.7050 marks, down from a close of 1.7085 marks Wednesday, when it hit a 12-month high of 1.7170.
"It's incredible, isn't it?" said Liliana Nealon, vice president at Union Bank of Switzerland, noting that the dollar has jumped 3.6 percent just since Friday. "I really think the market is looking back and saying, 'Wow.'"
For the world economy, the dollar rally is a mixed blessing, which is why the response from the United States and its economic partners has been relatively muted so far.
It is an immediate boon for American tourists, who had clearly been suffering from sticker shock on visits to Paris, London, Rome and Berlin, but whose dollars now go further in all those places. It can also ease some inflationary pressure by making imports cheaper.
The stronger dollar and the weaker mark are also welcome news to many Europeans. The shift has enabled countries in the European Monetary System, like France, Spain, and Britain, to lower interest rates to counter slowdowns or recessions.
Before the dollar rally, lowering interest rates might have weakened the franc, the peseta and the pound and pushed them out of their fixed trading ranges within the monetary system.
But the fall of the mark, the central currency in the system, has widened the room for maneuvering.
For American exporters and manufacturers, however, the stronger dollar could make competition abroad and at home more difficult, as American exports become more expensive and foreign imports cheaper.
But for this impact to be felt, the dollar would have to remain at these higher levels for some time.
"I don't think it is a fluke," said Lawrence A. Kudlow, chief economist for Bear, Stearns & Co. in New York. "It hasn't run its course, but it is bound to slow down."
Mr. Kudlow had been expecting the dollar to strengthen, but the move has been so quick that many other forecasters, like Michael R. Rosenberg, manager of international fixed-income research at Merrill Lynch, have sought to catch the wave by quickly revamping their forecasts that the dollar would stay low.
The rally has brought the dollar back to its levels of a year ago. But at 1.7050 marks to the dollar yesterday, it is still well below the average level of 1.88 in 1988 and the highs of more than 2
marks hit in the late 1980s. And it is still far below its all-time high of 3.475 marks in February 1985.
For American companies with large sales abroad, profits will be hurt when the foreign earnings are converted into dollars.
But the reverse will be true for Japanese and, especially, European companies that had been hit hard by a weak dollar.
Some corporations seemed to have been caught unprepared. Ms. Nealon said she has corporate customers who did not expect the dollar to rise much beyond a brief victory rally after the war. Now they hope to buy dollars when the value dips, only to find that the dollar just keeps rising, forcing them to pay even more.
1% A stronger dollar could also slow
or even eventually end the decline in the American merchandise trade deficit, which dropped to $100 billion last year.
Some economists have advocated an even lower dollar to help reduce this troublesome deficit.
But others, like Mr. Kudlow, contend that the deficit can continue to fall, even if a little more slowly, with the dollar at these levels. They say that American manufacturers are more competitive than they were a few years ago and that a modest economic recovery should not create a consumer boom that would cause a surge in imports and a rise in the trade deficit.
The response by officials in the Group of Seven, composed of the United States, Japan, Germany, Britain, France, Italy and Canada, was a little confusing Wednesday but did not indicate strong opposition to having the dollar at present levels.
In Bonn, Theo Waigel, the finance minister, said the United States and Germany could live with the current levels of the dollar.
His comments, coming on his return from a meeting with Treasury Secretary Nicholas F. Brady on Monday, were taken by traders as clearance to push the dollar higher, and it shot up, passing 1.70 marks and closing Wednesday at its highest level since March 27, 1990.
In Washington, David C. Mulford, the undersecretary of the Treasury for international affairs, told reporters: "We are concerned about the rapidity of the rise. We are not seeking a stronger dollar."
But he also said that Mr. Waigel's comment was accurate at the time of the meeting with Mr. Brady.
The dollar's surge started after it hit its low of 1.4475 marks on Feb. 11 in New York trading. At first many traders said the rally would be just a short-lived response to what was shaping up as a quick and easy victory in the war against Iraq. But the rally was pushed further on expectations of a rebound soon from the American recession and a slowing of economies abroad.
Then in early March, the German government said it would raise taxes to help pay for modernizing eastern Germany.
By raising taxes, the government would have to borrow less, making it suddenly more likely that German interest rates, which set the tone for Europe, would not rise further and even begin to decline.
Foreign exchange traders concluded that interest rates would fall abroad, while remaining stable in the United States or falling only slightly. Such a narrowing of the interest-rate differential between dollars and others currencies makes the dollar more attractive to foreigners.
One of the most immediate effects of the dollar's rise is on the contributions from Germany and Japan to pay for the costs of the war. A report from Bonn on Wednesday said the German government agreed to pay more marks to make up for the appreciation of the dollar.
The Japanese have been reluctant so far to cover the loss from the dollar rally. They made their pledge in yen but the United States wants it counted in dollars.
Many economists and foreign exchange traders say the rally is here to stay but they are not are sure how much further the dollar will rise. That forecast depends a lot on the recovery here and the actual cuts in interest rates abroad.
In addition, the Germans might get worried by the inflationary effect of a further fall in the mark and move to raise interest rates. Also, the United States and its allies in the Group of Seven, who have been trying to slow the rally with dollar-selling around the world, could decide to move firmly to cap the rally if it goes much further.
The dollar has risen only 9 percent against the yen because it never fell as far against the Japanese currency as it did against European currencies.