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Will the buck stop here? Soaring dollar: Central bankers seek a leveling off to help Germany and Japan.


INTERNATIONAL EFFORTS to stop a steep rise in the value of the dollar may take more than jawboning by the finance ministers and central bankers of the G-7 nations -- the U.S., Germany, Japan, Britain, France, Canada and Italy. A report just issued by President Clinton's Council of Economic Advisers was so ebullient about the U.S. performance that it is likely to act as a counter to what the G-7 communique intended.

It gets down to fundamentals. The U.S. economy is so sound, in contrast to the troubles of Japan and Germany, that investors the world over are flocking to the greenback. With the U.S. enjoying steady growth and low levels of unemployment without inflation, there is little incentive to lower interest rates sharply. Yet that is probably what it would take -- along with interest rate hikes by Japan and Germany that they can scarcely afford -- to prevent the dollar from getting even stronger.

From Treasury Secretary Robert Rubin's statement that "we have had a strong dollar for some time" [italics ours] to the G-7's weekend communique that "major misalignments in exchange markets . . . have been corrected," the signal went forth for dollar stability. But as world markets opened, some early appreciation of the yen and the mark mostly disappeared, thus confirming the opinion of many economists that the dollar may continue to soar.

If this is the case, central banks may be tempted to intervene heavily to keep exchange rates within unspoken ranges. The temptation should be resisted. Previous attempts at control have failed to checkmate economic forces beyond even the collective power of the G-7 governments. An overly strong dollar does hurt U.S. manufacturing exports, especially autos, but it also keeps inflation in check and helps U.S.-controlled multinational corporations with heavy investments abroad.

The best result would be the kind of dollar pause favored by the central bankers. But Joseph Stiglitz, the president's economic adviser, is not about to down-pedal an economic record that has sent President Clinton's approval ratings to new highs. In his report, he even dared to belittle Fed chairman Alan Greenspan's recent warning about "irrational exuberance" on Wall Street. "Overall," he said, "there is some degree of rational exuberance in our economy."

Pub Date: 2/11/97

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