THB, Banditos, Wayward and more confirmed for Cosmic Cocktail!

Dollar's plunge spurs worries about impact Analysts fear drop may trigger higher interest rates


Although European tourists have been enjoying unprecedented buying power on their grand tours of the United States, they may be the only immediate winners of the dollar's downward travels.

After the dollar hit all-time lows against the German mark over the past week, analysts are now concerned that the benefits of a weak dollar -- stronger exports and tourism -- may be more than offset by its disadvantages, such as more expensive imports, damage to other countries' economies and the threat of higher ** U.S. interest rates.

Another worry about the cheap greenback may be that its fall could trigger a further flight of foreign capital. The recent developments could also hasten the demise of the dollar as the world's most important reserve currency just as it celebrates its 200th anniversary.

What's more, Maryland is not expected to receive any immediate boost from the dollar because its economy is relatively isolated from currency fluctuations.

"On the whole it should be positive for the local economy, but it comes with risks. It's also a question of timing. The effect won't be felt for about a year," said Paul. W. Boltz, chief economic analyst at T. Rowe Price.

The delay is because trade contracts are usually signed six to nine months in advance. This makes it unlikely that the dollar will cause a surge in exports and domestic production that will help the economy and President Bush's re-election campaign. Administration officials have tacitly welcomed a cheap dollar as a way to revitalize the anemic recovery before November.

And because the dollar has fallen so far -- falling 7 percent over the past two weeks to a record low of 1.3998 German marks Tuesday before closing at 1.4083 marks Friday in New York -- the Federal Reserve is now unable to drop interest rates further to help stimulate the economy without risking a further slide in the currency. A complete dollar collapse could result in higher rates.

The immediate cause for the dollar's plunge is the divergence in U.S. and German interest rates, which reflects the two countries' different priorities. While the U.S. Federal Reserve wants low interest rates to spur an economic recovery, the German Bundesbank wants high rates to control inflation. The resulting gap of 6 percent has caused investors to flock to mark-denominated securities to get the higher interest.

Until this past week, the administration and many analysts welcomed the weak dollar as an easy way to make U.S. products competitive internationally and end the current economic stagnation.

The usual argument for a cheap dollar runs as follows: If foreigners need less money to buy dollars, then U.S. products become relatively cheaper and so more are sold. This boosts production at home and creates jobs. Tourism also wins because foreigners, find it cheap to visit the United States. Americans, on the other hand, keep their dollars at home because overseas trips become prohibitively expensive.

The local economy, for example, would stand to benefit when large companies such as Westinghouse try to sell overseas. Westinghouse, which employs 13,000 in Baltimore, makes radar and electronic systems that it sells domestically and overseas.

"In the long run it definitely will have a positive effect -- it helps make us more competitive," said Westinghouse spokesman Jeff Schmitt.

This sort of help, however, is limited because the Baltimore area is more isolated from the international economy than other regions, said Michael Conte, a professor of economics and finance at Loyola College.

If some companies find their goods easier to sell, Americans may find that many favorite consumer goods and cars have become more expensive. The German mark's strength can add $10,000 to the price of some luxury cars.

"This is the flip side to the stronger exports. The manufacturers won't be the only ones to suffer, but also the car dealers and retailers who carry these products," said Cliff Milligan, an analyst specializing in the mid-Atlantic region at DRI/McGraw Hill, an economic forecasting firm in Lexington, Mass.

The impact will be tempered, however, by the relative stability of the dollar against the Japanese yen, meaning that many household consumer products, such as stereos, cameras, VCRs and televisions, will not be affected by the past week's developments. The dollar has kept its value against the yen because Japanese interest rates are low.

Fewer imports will also temper the advantages to the port of Baltimore, although it should be an overall winner because port statistics show that it handles more export tonnage than import tonnage.

More fundamental than the effect of the recent decline on one sector of the economy or another is the general lack of confidence in the dollar.

Many European investors, whose money helped fuel the stock market explosion of the 1980s, have become increasingly wary of investing in U.S. bonds or stocks because they fear that when the time comes for them to convert their dollars back into their home currency, they will be left with little. Some European investment managers have already started to unload all their dollar investments, part of an overall trend that has seen more than $50 billion in overseas investment leave the United States since 1988.

Although low confidence in the dollar could be cyclical and only reflect the difference between German and U.S. interest rates, other signs show that the dollar has taken a permanent beating.

Spurred on by weak U.S. efforts to control inflation over the past 25 years -- wholesale prices have risen twice as fast in America as in Japan or Germany -- there has been a steady shift away from the dollar. The dollar's share of foreign-exchange reserves, for example, has fallen from 80 percent to 52 since 1975 and the number of countries that peg their currency to the dollar has shrunk from nearly 50 to 24.

More countries are putting their reserves in and aligning their currencies to a basket of currencies that includes the dollar but also the mark and yen. In the future, the European currency unit, or ecu, could be the biggest trading medium of exchange.

While such long-term trends do not explain weekly or monthly changes, they may provide the background to the unhappy anniversary of the "Mint Act" of 1792.

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad